3 Coprporate Governance in India Learning Outcomes 3.1 Have an overviwe of Corporate Governance Initiatives in India 32 Recall the governance provisions under the Companies Act, 2013 33 Explain Clause 49 of Listing Agreement 34 State Mandatory Requirements of Clause 49 35 State Non-Mandatory Requirements of Clause 49 36 Highlight the system of Corporate Governance in Public Sector Units ‘37 Suggest Guidelines on Corporate Governance in Public Sector Units 31 CORPORATE GOVERNANCE INITIATIVES IN INDIA The Indian system of corporate governance emphasizes a code of corporate governance for the companies that covers the whole range of systems of management in the companies. Corporate governance incorporates the structure, systems and processes ina corporation that are imperative to improve upon its wealth generating capacity. The company as a responsible corporate citizen, in its best interest cannot afford to ignore the requirements of corporate governance. Corporations’ are legal bodies having concomitant social and legal responsibilities. The code of corporate governance entails that corporations have to take into consideration the expectations of the society as well as aspirations of the various stakeholders. It is imperative for a corporation to work within competitive strategy but function within the ambit of legal, social and legal boundaries. Any good corporate practice must take into consideration two sets of claimants, creditors and shareholders, whose support is vital for survival, growih and competitiveness of the companies. Corporate governance entails well functioning board of directors that comprises of core group of professionally acclaimed non-executive directors who understand their dual role of appreciating the issues put forward by management and of honestly discharging their fiduciary responsibilities towards the company’s shareholders as well as creditors. Good corporate governance practices also endorse measures for community service like education, healthcare of the community, environmental Preservation etc. 3.1 Scanned with CamScanner32 Corporate Governance, Ethics & Social Responsibility of Business Corporate governance framework in India consists of the following © 1. Companies Act, 2013. 2. Securities Contracts (Regulation) Act. 1956. 3, Securities and Exchange Board of India Act, 1992. 4, Depositories Act, 1996. 5. Clause 49 of Equity Listing Agreement of stock exchange. Over the years, several reforms in corporate governance have been initiated in India. The main focus of the reforms in corporate governance in India is on: (i) Development an efficient capital market. (ii) Protection of the interest of creditors and minority shareholders. (ii) Greater transparency in the functioning of companies. (iv) Timely and credible disclosure by companies. (0) Reforming the composition and processes of the board of directors. (vi) Promoting shareholders’ democracy in public limited companies. Box 3.1: CORPORATE GOVERNANCE IN ITC HID. The National Award for Excellence in Corporate Governance, 2006 was received by ITC for IT Strong Corporate Governance Model and Visionary Leadership. The company follows formalized three tiered inter-linked decision-making and governance procedure, striking a fine balance between two parameters, i.e., need for executive freedom and need for supervision, control and checks and balances. The decision-making in the company is as follows: () The Board of Directors, at the topmost level, is trustee of the shareholders. The Board comprises of executive directors and also, non-executive directors who are in substantial majority. The Board has the responsibility of strategic supervision, fulfilling statutory obligations and outlining the code of ethics. (i) Major responsibilities of Board are on the recommendations of different sub- committees like, Nominations Committee, Audit Committee, Legal Committee Remuneration Committee, etc. whose membership consists of non-executive directors to ensure transparency. (ii) Strategic management is delegated to Corporate Management Committee that comprises of full time directors and senior management. oe CII (RAHUL BAJAJ) COMMITTEE, (1996) EZ; Confederation of Indian Industry (Cll) took an extraordinary initiative on Corporate Governance, by setting up a committee under the chairmanship of Rahul Bajaj to examine corporate governance issues and recommend a voluntary code of best practices which could be followed by the Indian companies, both in privateand public sector, banks, financial institutions, and other corporate entities. Its first draft of the code was prepared by April 1997 and broadly circulated and the final code which was called Desirable Scanned with CamScannerCorporate Governance in India 3.3 Aaorporate Governance Code was released in April 1998. The main objective of that document was to maximize long term shareholder value with the basic premise that whatever maximizes shareholder value must necessarily maximize Corporate prosperity and it best satisfies the basic claims of creditors, employees, shareholders and the government. There are some key recommendations stated in the draft, like the board meeting should be there at least once after two months ie. six times a year with an agenda items requiring half-day discussions and it’s not mandatory to adopt a German system of two-tier board to ensure desirable corporate governance as two-tier or multi-tier system is not a panacea to all corporate problems. To ensure true corporate governance in the organization, proper Tules, regulations, limits on directorships must be followed along with a proactive role to be played by non-executive directors. To sectiré better effort from non-executive directors, companies should pay a commission over and above the sitting fees for the use of the professional inputs. Another very important recommendation is that while reappointing members on the board, attendance record of concerned director must be given and asa general practice, one should not re-appoint any non-executive director who has not had the time attend even one half of the meetings i.e, 50% of meetings. A director should not on the board of ten companies. The key information to be paced before the meeting must be sufficient and must contain annual operating plans, budgets, together with up-dated long term plans, capital budgets, manpower and overhead budgets, quarterly results for the company as a whole, 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 and fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems. Corporate governance is a concept, rather than an individual instrument. It includes debate on the appropriate governance, management and control structures of a company. Itincludes the rules relating to the power relations between owners, the board of directors, management and the stakeholders such as employees, suppliers, customers as well as the public at large. The members of the Board should have clear and defined Corporations around the worldare increasingly recognizing that sustained growth of their organization requires cooperation of all stakeholders, which requires adherence to the best corporate governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders, The financial institutions should divest their stakes if these were less than 10% stake in the company. ‘ Scanned with CamScanner34 Corporate Governance, Ethics & Social Responsibility of Business De Manglam Birla Committee on Corporate Governance (2000) ee In India, corporate governance initiatives were undertaken by the Ministry of Corporate Affaits (MCA) and the Securities and Exchange Board of India (SEBI) following Cll’s initiative. The Securities and Exchange Board of India (SEBI) set up a committee under the chairmanship of Kumar Mangalam Birla to encourage and elevate standards of corporate governance. This Report was the official and inclusive endeavour to develop a Code of governance for Indian corporate sector. The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumar Mangalam Birla Committee Report. Its recommendations were enshrined as Clause 49 of the Listing Agreement in the year 2000. The Committee aimed at improving the standards of Corporate Governance, which are divided into obligatory and non-mandatory recommendations. The said recommendations have been made pertinent to all listed companies with the paid-up capital of * 3 crores and above or net worth of ° 25 crores or more at any time in the olden times of the company. The eventual responsibility for putting the recommendations into practice lies directly with the Board of Directors and the management of the company. The Board should set up a qualified and independent audit committee to enhance the credibility of financial disclosures and to promote transparency. Each of Company must provide consolidated statement in respect of all the subsidiaries in which they hold 51% or more of the share capital. Further, the shareholders of the company must exhibit interest and involvement in the appointment of directors and auditors. The Board meetings should be held at least four times a year, with a maximum gap of four months between any two meetings. A separate section on Corporate Governance in the annual reports is to be introduced covering statement on Company's philosophy on code of corporate governance, board of directors, audit committee, shareholders committee, disclosures etc. The non-mandatory recommendations included measures like credible and transparent policy in determining and accounting for the remuneration of the directors, half-yearly declaration of the financial performance, introducing postal ballots for shareholders of the company who are unable to attend the meetings especially on critical matters like alterations in the memorandum of the company, sale of whole or substantially whole of the undertaking, corporate restructuring etc, So, the main focus of the committee was on the investors and the shareholders. Further, SEBI is to lay norms to be followed to maintain and raise the standards of corporate governance in the Indian firms in consonance with the changing economic environment. These have also been endorsed through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996, Scanned with CamScannerCorporate Governance in India 3.5 Most of the recommendations of Birla Committee were accepted by the SEBI which introduced Clause 49 of the Listing Agreement for public companies in 2000. Naresh Chandra Committee on Corporate Audit and Governance (2002) ye The Enron debacle of 2001 involving the hand-in-glove connection Ae the auditor and the corporate client, the scams involving the descend of the corporate giants in the U.S. like the WorldCom, Qwest, Global Crossing, Xerox and the consequent ratification of the rigorous Sarbanes Oxley Act in the U.S were some significant factors which led the Indian Government to wake up to the changing scenario. The Indian regulators, with an objective of deterring recurrences of such scams became active to examine such issues. So, the Ministry of Corporate Affairs appointed Naresh Chandra Committee on Corporate Audit and Governance in.2002 to examine various corporate governance issues and amendments to the law involving the auditor- clientrelationships and the role of independent directors. The committee, after analyzing the weaknesses of the prevailing system, submitted its comprehensive report to the Ministry of Finance on 23“ December, 2002. The main emphasis of the Naresh Chandra Committee was on independence of audit as an important measure of governance and it suggested _ that the audit committees should consist entirely of independent directors. The Committee made recommendations on two key aspects of corporate governance: financial and non-financial disclosures and independent auditing and board oversight of management. It recommended that Audit Firm’s rotation isnota must, audit partners should rotate after every five years, audit committee to be set up of all independent directors. It also made efforts to bring transparency and accountability in the structure of corporate governance through the enactment of Companies Act and its amendments. The committee's report is substantially comprehensive to cover various aspects of governance that.would go a long way to restore the confidence of the investors and facilitate to establish a well-regulated market. Most of the recommendations were incorporated in The Companies (Amendment) Bill, 2003 and in the bill amending the Chartered Accountants Act. .R.Narayana Murthy Committee “a In 2002, the SEBI analyzed the statistics of acquiescence with the clause 49 by listed companies and felt that there was a call for to look away from the mere systems and procedures if corporate governance was to be made efficient in protecting the interest of investors. As a consequence, the SEBI constituted a Committee under the Chairmanship of Shri N.R.Narayana Murthy consisting of members from stock exchanges, commerce and industry chambers, professionals and investors associations etc. The main objective was of reviewing the functioning of the corporate governance code by listed companies and issue of revised clause 49 based on its recommendations. Scanned with CamScanner3.6 Corporate Governance, Ethics & Social Responsibility of Busines A few mandatory recommendations of the Committee include the need of an effective audit committee for quality governance; financial disclosures by the company inchiding transactions with related parties; proceeds from initial public offerings; information of risk assessment and minimization procedures should be disclosed by the corporate executive board in the Annual reports of the Company; making it obligatory for the company to lay down a code of conduct; position of nominee directors and a number of improved disclosures like the compensation to non-executive disclosures to be approved by the shareholders in the general meeting, analyst reports must disclose relationship with the company etc. The non-mandatory recommendations aim at regime providing for unqualified corporate statements; board of directors should undergo training, evaluation ofnon-executive director's performance by a peer group comprising of board of directors other than the person to be evaluated, etc. According to N. R. Narayana Murthy, “Good Corporate governance is a state of mind. It cascades from a set of core values that need to be instilled at all levels of the organization. These values are time and context invariant”. (Narayana Murthy, N.R., “The Born Again Corporate Citizen”, Business Today, Vol. 9, January, 7th-21*, 2000) Dr. J.J. Irani Expert Committee (2005) On2™ December, 2004, the Government of India constituted a committee under the Chairmanship of Dr. J. J. Irani, Director, Tata Sons, with the task of advising the Government on the projected revisions to the Companies Act,1956, The committee had the mandate to suggest simplified compact law that would beableto tackle the changes taking place in the nationwide and global scenario, endorsing internationally accepted best practices as well as offer flexibility for the timely culmination of new arrangements to confirm the requirements of ever-changing business models. . The report of the committee that endorses internationally best practices was submitted to the Government of India on 31* May, 2005. The report seeks to fine-tune the compulsions and ground realities of modern business, along with emphasis on stakeholders’ democracy and need for self-regulation. The committee recommended liberty to the owners and shareholders of the company to enable them to work in a transparent manner as well as to take key decisions. Another major recommendation of the committee was that the new company bill must recognize principles of ‘Class action’ and ‘Derivative action’. The committee also looked into the matters pertaining to the capital market at length. COMPANIES ACT, 2013 The Companies Act, 2013 was enacted on 29th August, 2013. Various new provisions have been included in the Act which aim at improving the Scanned with CamScannerCorporate Governance in India 37 governance of the public companies The following provisions have been added into the Companies Act, 2013 : 1. Requisites of new committees of Board of Directors (Sec. 178) . More influential Audit Committee (Sec. 177) . Precise duties of Directors (Sec. 166) . Mode of appointment and tenure of Independent Directors (Sec. 149, 150) . Code of conduct for Independent Directors (Schedule IV) . Rotation of Auditors (Sec. 139) Restraint on non-audit services by Auditors (Sec. 144) . Liability of Auditors (Sec. 143) . Disclosure and sanction of Related Party Transactions (Sec. 188) 10. Class Action Suits (Sec. 245) 11. National Financial Reporting Authority (Sec. 132) 12. Corporate Social Responsibility (Sec. 135) The constitution of the above committee shall be disclosed in Board’s report. The chairperson or any other authorized member of committee shall attend General Meeting of the shareholders. Pon eo PXnanw oe USE 49 OF LISTING AGREEMENT Based on the recommendations of Kumar Mangalam Birla Committee, ae 49 on Corporate Governance was inserted in the listing agreement in was revised in January 2006 by SEBI. The revised clause 49 came into, oor from January 1, 2006. / Recent Amendments to Clauses 35B and 49 of the Equity Listing Agreement The Companies Act, 2013 wasenacted on August 30, 2013 which provides for a major overhaul in the Corporate Governance norms for all companies. The rules pertaining to Corporate Governance were notified on March 27,2014. The requirements under the Companies Act, 2013 and the rules notified thereunder would be applicable for every company or a class of companies (both listed and unlisted) as may be provided therein. In view of this, SEB] released the amendments to clause 49 of the Equity Listing Agreement vide circular dated April 17th 2014. The revised clause 49 updates and aligns the Listing Agreement with corporate governance changes brought out in the Companies Act, 2013, Applicability : (i) The revised Clause 49 would be applicable to all listed companies with effect from October 01, 2014. However, the provisions of Clause Scanned with CamScanner38 Corporate Governance, Ethics & Social Responsibility of Business 49(Vi)(©) as given in Part-B shall be applicable to top 100 listed companies by market capitalisation as at the end of the immediate previous financial year. (ii) The provisions of Clause 49(VII) as given in Part-B shall be applicable to all prospective transactions, (ii) For other listed entities which are not companies, but body corporate orare subject to regulations under other statutes (e.g. banks, financial institutions, insurance companies etc,), the Clause 49 will apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities. The Clause 49 is not applicable to Mutual Funds. (ia) The revised Clause 35B would be applicable to all listed companies and the modalities would be governed by the provisions of Companies (Management and Administration) Rules, 2014. WY MANDATORY REQUIREMENTS OF CLAUSE 49 Clause 35B of Equity Listing Agreement (i) The issuer agrees to provide e-voting facility to its shareholders, in respect of all shareholders’ resolutions, to be passed at General Meetings or through postal ballot. Such e- voting facility shall be kept open for such period specified under the Companies (Management and Administration) Rules, 2014 for shareholders to send their assent or dissent. (if) Issuer shall continue to enable those shareholders, who do not have access to e-voting facility, to send their assent or dissent in writing on 2 postal ballot as per the provisions of the Companies (Management and Administration) Rules, 2014 or amendments made thereto. (iii) Issuer shall utilize the service of any one of the agencies providing e- voting platform, which is in compliance with conditions specified by the Ministry of Corporate Affairs, Government of India, from time to time. (iv) Issuer shall mention the Internet link of such e-voting platform in the notice to their shareholders. Clause 49 on Equity Listing Agreement Clause 49 relates to corporate governance. In particular, the mandatory provisions of Clause 49 are divided under eleven headings as follows : (I) Principles : A. The rights of shareholders B, Role of stakeholders in corporate governance Scanned with CamScanneree Corporate Governance in India 3.9 i Pa (a) C. Disclosure and transparency D. Responsibilities of the Board. Board of Directors . Composition of Board . Independent directors . Non-executive directors’ compensation and disclosures . Other provisions as to Board and Committees. . Code of Conduct Whistle Blower Policy. Audit Committee Nomination and Remuneration Committees Subsidiary Companies Risk Management Related Party Transactions Disclosures CEO/CFO Certification Report on Corporate Governance Compliance. mmonm > 49 on Shareholder Rights The company should seek to protect and facilitate the exercise of shareholders’ right to: Participate in and be sufficiently informed on decisions concerning fundamental corporate changes. Vote in shareholder meetings. Ask questions to the Board and propose resolutions. Participate in nomination and election of Board members. Exercise their ownership rights. Put forward their grievances to the company. Be protected from abusive actions in the interest of controlling shareholders. Apart from the above, * All shareholders of same series of a class should be treated equally. . * Processes and run for general shareholder meetings should allow for equitable treatment of all shareholders. * Foreign shareholders should also have voting rights. Scanned with CamScanner3.12 Corporate Governance, Ethics & Social Responsibility of Busines, its shareholding below 50%, without passing a special resolution in its general meeting. * Selling, disposing or leasing of more than 20% of assets of the materia] subsidiary will require approval of shareholders by way of specia| resolution. Clause 49 on Related Party Transactions ‘Clause 49 has tightened the provisions and disclosures requirements for related party transactions (RPT). Some of the requirements are: * RPTs to require prior approval of the audit committee. * Material RPTs to require shareholder approval though special resolution and concerned related patties to abstain from voting on such tesolutions. * Disclosure of all material RPTs on a quarterly basis with compliance Teport on corporate governance. * Disclosure of policies on dealing with RPTs, in website and annual report. Clause 49 on Directorial Remuneration ~ The provisions relating to directorial remuneration have been kept unchanged. They include: * Disclosure of all pecuniary relationships of non-executive directors with the company. * Disclosure of detailed information on remuneration to directors. * Disclosure of criteria of making payments to non-executive directors. * Disclosure of shares/ other instruments held by non-executive directors. Clause 49 on Other Disclosures WY Clause 49 stipulates mandatory disclosure of many corporate actions. Some of these are: Letter of Appointment : Disclosure of letter of appointment of an ID along with detailed profile, on the company website and stock exchange, within one working day of date of appointment. Directorial Resignation : Disclosure of letter of resignation of directors along with reasons, on the company website and stock exchange, within one working day of receipt of the letter. Disclosure of training imparted to IDs, in the Annual Report. Disclosure of details of establishment of vigil mechanism, in company website and Board's report. + Disclosure of the remuneration policy and the evaluation criteria in the Annual Report Scanned with CamScannerCorporate Governance in India 3.13 3.5 NON-MANDATORY REQUIREMENTS OF CLAUSE 49 Most of the provisions in the new Clause 49 are mandatory in nature. However there are some, which are non-mandatory and are left in the discretion of the companies to adhere. The non-mandatory requirements in the new Clause 49 are: * The Board may appoint a non-executive Chairman who should be entitled to maintain Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. __* Appointment of separate individuals to the posts of Chairman and MD/CEO. ~ * Disclosure of half-yearly financial performance including summary of the significant events. * Moving towards a regime of unqualified financial statements. * Reporting of the internal auditor directly to the audit committee. 3.6 CORPORATE GOVERNANCE IN PUBLIC SECTOR UNITS _ The public sector units not only have to fulfil the social responsibilities due to spending of tax-payer’s money for their activities but also have to fulfil profitmaking. In India, PSUs constitutes an important part of business entities, butit is often being condemned of ineffectiveness and reprehensible governance The factors which deter the functioning of corporate governance in ‘units of India are contradictory objectives, excessive government e, lack of executive and commercial sovereignty and lack of directors. All this needs to be checked for an accountable and corporate governance structure. rate governance is on the agenda of company Boards worldwide. al investments from financial institutions such as lending ns, insurance companies and pension funds are on the rise; investors increasingly demanding transparency in company accounts, fair per odic updates about the company’s performance. Corporate er, does not mean protecting the interests of investors alone; g fairness and transparency in transactions with all the g customers, employees, investors, vendors, government at large. Corporate governance seeks to build confidence and 0 eholders by observing fairness and transparency in all company aye year 2009 has been the year of the public sector world over. As [po due to the financial crisis, governments have driving force into the role of vigorously n India too, the government played important ther igh phase. Scanned with CamScanner