CHAPTER 3

LANDMARKS IN THE EMERGENCE OF

CORPORATE GOVERNANCE
 OBJECTIVES

Corporate governance as a desideratum for

orderly development of an economy has evolved
over the past three decades, and, in its present
system and structure, is the outcome of studies,
research and the sum total of responses by
regulators of corporate scams and debacles. This
chapter traverses through the history of evolution
of the concept and system of corporate
governance over the years, both in the West and
in India.
 CHAPTER OUTLINE
❖ Introduction
❖ Corporate Governance Committees
❖ World Bank on Corporate Governance
❖ OECD Principles
❖ McKinsey Survey on Corporate Governance
❖ Sarbanes—Oxley Act, 2002
❖ Indian Committees and Guidelines
❖ Working Group on the Companies Act, 1996
❖ The Confederation of Indian Industry’s Initiative
❖ SEBI’s Initiatives
❖ Naresh Chandra Committee Report, 2002
❖ Narayana MurthyCommittee Report, 2003
❖ Dr J. J. Irani Committee Report on Company Law, 2005
 Introduction
There has been a perceptible change in people’s
minds as to the objective of a corporation - from
one which was intended to benefit exclusively the
shareholders to one which is expected to benefit
all its stakeholders. The corporate scams and
frauds that came to light have brought about a
change in the thinking of advocates of free
enterprise that the system was not self-regulatory
and needed substantial external regulation, which
should penalise the wrongdoers while those who
abide by the rules of the game are amply
rewarded by the market forces.
 Introduction (contd)

All these measures have brought about a

metamorphosis in corporations that realised
that the people who invest in corporations are
pretty serious about corporate governance;
hence they started internalising these values
and later adopting them, initially albeit
selectively and sporadically.
 Developments in the USA

Corporate governance gained importance with the

occurrence of the Watergate scandal in the United
States. Thereafter, as a result of subsequent
investigations, the US regulatory and legislative
bodies were able to highlight control failures that
had allowed several major corporations to make
illegal political contributions and to bribe
government officials. In 1979 by the Securities and
Exchange Commission’s proposals for mandatory
reporting on internal financial controls.
 Developments in the USA (contd)
In 1985, following a series of high profile business
failures in the USA, the most notable one being the
Savings and Loan collapse, the Treadway Commission
was formed to identify the main causes of
misrepresentation in financial reports and to
recommend ways of reducing incidence thereof. The
Treadway Report published in 1987 highlighted the
need for a proper control environment, independent
audit committees and an objective internal audit
function and called for published reports on the
effectiveness of internal control.
 Developments in the UK

In England, the seeds of modem corporate

governance were probably sown by the BCCI
scandal. BCCI was a global bank, constituting
multiple layers of entities related to one another
through an impenetrable series of holding
companies, affiliates, subsidiaries,
banks-within-banks, insider dealings and
shareholder (nominee) relationships. With this
corporate structure of BCCI and shoddy
record-keeping, regulatory review and audits, the
complex BCCI family of entities was able to evade
ordinary legal restrictions on the movement of
capital and goods as a matter of daily practice and
routine.
 Developments in the UK (contd)
Since BCCI was a vehicle fundamentally free of
government control, it was an ideal mechanism for
facilitating illicit activity by others, including such
activity by officials of many of the governments whose
laws BCCI was breaking. The failure of Barings Bank
was another landmark that heightened people’s
awareness and sensitivity on the issue and the resolve
that something ought to be done to stem the rot of
corporate misdeeds. Nick Leeson was posted in charge
of the back office operations of Barings Bank as well. He
started trading on behalf of the Bank, when he had to
trade only on behalf of the customers.
 Developments in the UK (contd.)

Eventually when his strategy failed because of an

earthquake in Japan, Barings Bank had already
lost $ 1.4 billion and it had to shut office.

As a result of these failures and lack of regulatory

measures from authorities as an adequate
response to check them in future, the Committee
of Sponsoring Organisations (COSO) was born.
The report produced by it in 1992 suggested a
control framework, and was endorsed and refined
in the four subsequent UK reports: Cadbury,
Ruthman, Hampel and Turnbull.
 Cadbury Committee on Corporate
Governance, 1992

The stated objective of the Cadbury Committee

was "to help raise the standards of corporate
governance and the level of confidence in
financial reporting and auditing by setting out
clearly what it sees as the respective
responsibilities of those involved and what it
believes is expected of them".
 Cadbury Committee on Corporate
Governance, 1992 (contd)
The Cadbury Code of Best Practices had 19
recommendations.
Relating to the board of directors, the
recommen-dations are:
o The Board should meet regularly, retain full and
effective control over the company and monitor
the executive management.
o There should be a clearly accepted division of
res- ponsibilities at the head of a company, which
will ensure balance of power and authority, such
that no individual has unfettered powers of
decision.
 Cadbury Committee on corporate
Governance, 1992 (contd)

o The board should include non-executive directors

of sufficient calibre and number for their views to
carry significant weight in the board's decisions.
o All directors should have access to the advice and
services of the Company Secretary, who is res-
ponsible to the Board for ensuring that board
procedures are followed and that applicable rules and
regulations are complied with. Any question of the
removal of company secretary should be a matter for
the board as a whole.
 Cadbury Committee on corporate
Governance, 1992 (contd)

oAll directors should have access to the advice

and services of the Company Secretary, who is
responsible to the Board for ensuring that board
procedures are followed and that applicable
rules and regulations are complied with. Any
question of the removal of company secretary
should be a matter for the board as a whole.
 Cadbury Committee on corporate
Governance, 1992 (contd)
Relating to the non-executive directors the
recommendations are:
o Non-executive directors should bring an
independent judgment to bear on issues of
strategy, performance, resources, including key
appointments, and standards of conduct.
o Non-executive Directors should be appointed for
specified terms and reappointment should not
be automatic.
o Non-executive Directors should be selected
through a formal process and both, this
process and their appointment, should be a
matter for the Board as a whole.
 On reporting and controls, the Cadbury Code of Best
Practices stipulate the following:
o It is the Board's duty to present a balanced and
understandable assessment of the company's position.
o The Board should ensure that an objective and
professional relationship is maintained with the
Auditors.
o The Board should establish an Audit Committee of at
least 3 Non-Executive Directors with written terms of
reference, which deal clearly with its authority and
duties.
o The Directors should explain their responsibility for
preparing the accounts next to a statement by the
Auditors about their reporting responsibilities.
o The Directors should report on the effectiveness of the
company's system of internal control.
 The Greenbury Committee, 1995
This Committee was set up in January 1995 to identify
good practices by the Confederation of British Industry
(CBI) in determining directors' remuneration and to
prepare a code of such practices for use by public
limited companies of the United Kingdom.
The Committee
o Aimed to provide an answer to the general concerns
about the accountability and level of directors' pay.
o Argued against statutory control and for
strengthening accountability by the proper allocation
of responsibility for determining directors'
remuneration, the proper reporting to shareholders,
and greater transparency in the process.
 The Greenbury Committee, 1995
(contd)

o Produced the Greenbury Code of Best Practice

which was divided into four sections thus:
Remuneration committee
Disclosure
Remuneration policy
Service contracts and compensation.
 The Hampel Committee, 1995
The Hampel Committee was set up in November 1995 to
protect investors and preserve and enhance the
standing of companies listed on the London Stock
Exchange.
The Committee
o Developed further the Cadbury Report
o Produced the Combined Code
o Recommended that
The auditors should report on internal control
privately to the directors
The directors maintain and review all (and not
just financial) controls
 The Hampel Committee, 1995 (contd.)

Companies that do not already have an

internal audit function should from
time to time review their need for one

o Introduced the Combined Code that consolidated

the recommendations of earlier corporate
governance reports (Cadbury and Greenbury).
 The Turnbull Committee, 1999

The Turnbull Committee was set up by the The Institute

of Chartered Accountants in England and Wales
(ICAEW) in 1999
The committee
o Provided guidance to assist companies in
implementing the requirements of the Combined
Code relating to internal control.
o Recommended that where companies do not have an
internal audit function, the board should consider the
need for carrying out an internal audit annually.
o Recommended that boards of directors confirm the
existence of procedures for evaluating and managing
key risks.
 World Bank on Corporate Governance
o TheWorld Bank, both as an international develop-
ment bank and as an institution interested and
involved in equitable and sustainable economic
development worldwide, was one of the earliest
international organisations to study the issue of
corporate governance and suggest certain
guidelines.
o Corporate governance is concerned with holding
the balance between economic and social goals and
between individual and communal goals. The
governance framework is there to encourage the
efficient use of resources and equally to require
accountability for the stewardship of those
resources.
 World Bank on Corporate Governance
(contd)

o Openness is the basis of public confidence in the

corporate system and funds will flow to those
centres of economic activity, which inspire trust.
This Report points the way to the establishment
of trust and the encouragement of enterprise. It
marks an important milestone in the development
of corporate governance.
 OECD Principles

o The Organisation for Economic Cooperation and

Development (OECD) was one of the earliest
non-governmental organisations to work on and
spell out the principles and practices that should
govern corporations in their goal to attain
long-term shareholder value.
In summary, they include the following elements.

The Rights of Shareholders

The rights of shareholders include a set of rights to
secure ownership of their shares, the right to full
disclosure of information, voting rights, participation in
decisions on sale or modification of corporate assets
mergers and new share issues.

Equitable Treatment of Shareholders

The OECD is concerned with protecting minority

shareholders’ rights by setting up systems that keep
insiders, including managers and directors, from taking
advantage of their roles.
The Role of Stakeholders in Corporate Governance
The OECD recognises that there are other
stakeholders in companies in addition to
shareholders. Banks, bondholders and workers,
for example, are important stakeholders in the
way in which companies perform and make
decisions.

Disclosure and Transparency

The OECD lays down a number of provisions for

the disclosure and communication of key facts
about the company ranging from financial details to
governance structures including the board of
directors and their remuneration.
The Responsibilities of the Board

The OECD guidelines provide a great deal of

details about the functions of the board in
protecting the company and its shareholders.
These include concerns about corporate strategy,
risk, executive compensation and performance as
well as accounting and reporting systems.
 McKinsey Survey on Corporate
Governance

McKinsey, the international management consultant

organisation conducted a survey with a sample size of
188 companies from six emerging markets (India,
Malaysia, Mexico, South Korea, Taiwan and Turkey), to
determine the correlation between good corporate
governance and the market valuation of the company.
McKinsey Survey on Corporate Governance
(contd)

In short, good corporate governance increases market

valuation by:

o Increasing financial performance;

o Transparency of dealing, thereby reducing the risk

that boards will serve their own self-interest;

o Increasing investor confidence.

McKinsey Survey on Corporate Governance
(contd)

McKinsey rated the performance on corporate

governance of each company based on the following
parameters:
o Accountability: Transparent ownership, Board size,
Board accountability, Ownership neutrality

o Disclosure and Transparency of the Board, Timely

and accurate disclosure, Independent Directors

o Shareholder equality: One share, One vote

McKinsey Survey on Corporate Governance
(contd)

Through the survey, McKinesy found that companies

with good corporate governance practices have high
price-to-book values indicating that investors are
willing to pay a premium for the shares of a
well-managed and governed company. Additionally,
the survey revealed that investors are willing to pay
a premium of as much as 28% for shares of such a
corporate governance based company.
McKinsey Survey on Corporate Governance
(contd)

Companies in emerging markets often claim that

Western corporate governance standards do not
apply to them. However, the survey revealed that
studies of the six emerging markets show that
investors the world over look for high standards of
good governance. Additionally, they are willing to
pay a high premium for shares in companies that
meet their requirements of good corporate
governance.
 Sarbanes-Oxley Act, 2002

The Sarbanes--Oxley Act (SOX Act), 2002 is a

serious attempt to address all the issues
associated with corporate failures to achieve
quality governance and to restore investor
confidence. The Act contains a number of
provisions that dramatically change the reporting
and corporate directors governance obligations of
public companies, the directors and officers.
 Sarbanes-Oxley Act, 2002 (contd)
Important provisions contained in SOX Act are briefly
given below:

Establishment of Public Company Accounting

Oversight Board (PCAOB)

All accounting firms will have to register themselves

with this board and submit among other details
particulars of fees received from public, company
clients for audit and non-audit services, financial
information about the firm, list of firms staff who
 Sarbanes-Oxley Act, 2002 (contd)

participate in audits, quality control policies,

information on civil criminal and disciplinary
proceedings against the firm or any of the staff.

The board will conduct annual inspections of firms,

which audit more than 100 public companies, and once
in three years in other cases. The board will establish
rules governing audit quality control, ethics,
independence and other standards. It can conduct
investigations and displinary proceedings and can
impose sanctions on auditors. The board reports to SEC.
 Audit Committee

o The SOX Act provides for a “new improved”

Audit Committee.

o The audit committee is responsible for

appointment, fixing fees and oversight of the
work of independent auditors. The committee is
also responsible for establishing reviewing the
procedures for the receipt, treatment of
accounts, internal control and audit complaints
received by the company from the interested or
affected parties.
 Audit Partner Rotation
o The SOX Act provides for mandatory rotation of
lead audit or co-ordinating partner and the
partner reviewing audit once every five years.

Improper Influence on Conduct of Audits

o It will be unlawful for any executive or director of

the firm to take any action to fraudlently influence,
coerce, manipulate or mislead any auditor engaged
in the performance of an audit with the view to
rendering the financial statements materially
misleading.
 Prohibition of Non-audit Services
o Non-audit services include: (i) book-keeping or
other services related to the accounting records or
financial statements of the client; (ii) financial
information system, design and implementation;
(iii) appraisal or valuation services, fairness
opinions; (iv) acturial services; (v) internal audit
outsourcing services; (vi) management functions or
human resources; (vii) broker or dealer, investment
adviser, or investment banking services; (viii) legal
services or expert services unrelated to the audit
and (ix) any other service that the board
determines, by regulation, is impermissible.
However, the Board has the power to grant
exemptions.
 CEOs and CFOs Required to Affirm Financials

o Chief Executive Officers and Chief Finance Officers

are required to certify the reports filed with the
Securities Exchange Commission. If the financials
are required to be restated due to material
non-compliance “as a result of misconduct” of CEO
or CFO, then such CEO or CFO will have to return to
the company bonus and any other incentives
received by him. False and or improper certification
can attract fine ranging from $ 1 million to $ 5
million or up to 10 years imprisonment or both.
 Loans to Directors

o The SOX Act prohibits U.S. and foreign companies

with securities traded within U.S. from making or
arranging from third parties any type of personal
loan to directors.
 Attorneys

o The attorneys dealing with the publicly traded

companies are required to report evidence of
material violation of securities law or breach of
fiduciary duty or similar violations by the
company or any agent of the company to the
Chief Counsel or CEO and if the Counsel or CEO
does not appropriately respond to the evidence
the attorney must report the evidence to the
audit committee or the board of directors.
 Securities Analysts

o The SOX Act has a provision under which brokers

and dealers of securities should not retaliate or
threaten to retaliate an analyst employed by the
broker or dealer for any adverse, negative or
unfavourable research report on a Public
Company.
 Penalties

o The penalties prescribed under SOX Act for any

wrongdoings are very stiff. Penalties for willful
violations are even stiffer. Any CEO or CFO
providing a certificate knowing that it does not
meet with the criteria stated may be fined upto $
1 million and/or imprisonment upto 10 years.
 Indian Committees and Guidelines

Working Group on the Companies Act, 1956.

The government accordingly set up a Working Group

in August 1996 for this purpose.

The Working Group on the Companies Act has

recommended a number of changes and also
prepared a working draft of Companies Bill 1997. The
Bill was introduced in the Rajya Sabha on 14 August
1997, containing the following recommendations.
 Financial disclosures recommended by the
Working Group on the Companies Act

o A tabular form containing details of each director’s

remuneration and commission should form a part of the
Directors’ Report.
o A listed company must give certain key information on
its divisions or business segments as a part of the
Directors Report in the Annual Report.
o Where a company has raised funds from the public by
issuing shares, debentures or other securities, it would
have to give a separate statement showing the end-use
of such funds.
o The disclosure on debt exposure of the company should
be strengthened.
Non-Financial disclosures recommended by
the Working Group on Companies Act

1. A comprehensive report on the relatives of directors

- either as employees or Board members - to be an
integral part of the Directors’ Report of all listed
companies.
2. Companies have to maintain a register, which
discloses interests of directors in any contract or
arrangement of the company.
3. 3.Likewise, the existence of the directors’
shareholding register and the fact that members in
any AGM can inspect it should be explicitly stated in
the notice of the AGM of all listed companies.
Non-Financial disclosures recommended by
the Working Group on Companies Act
(contd.)
4. Details of loans to directors should be disclosed as
an annex to the Directors’ Report in addition to
being a part of schedules of the financial statements.
5. Appointment of sole selling agents for India will
require prior approval of a special resolution in a
general meeting of shareholders.
6. Subject to certain exceptions there should be a
Secretarial Compliance Certificate forming a part of
the Annual Returns that is filed with the Registrar of
Companies.
Non-Financial disclosures recommended by
the Working Group on Companies Act
(contd.)

7. The Compliance Certificate should certify in

prescribed format that the secretarial requirements
under the Companies Act have been adhered to.
 Deficiencies of the Companies Act

(i) Though non-executive directors can play a significant

role in providing independent and objective opinion in
discussions on many strategic areas in board
deliberations, the Act does not assign them any
formal role between executive and non-executive
directors

(ii) In actual practice, non-executive directors have

only ornamental value.
 Deficiencies of the Companies Act (contd.)

(iii) With regard to financial reporting, the provisions of

the Act make it more rule-based and ritualistic, rather
than being transparent.

(iv) The Act does not prescribe any formal qualifications

for a director of a company, with the result even an
incompetent and mediocre person can become a
member of the board.
 Deficiencies of the Companies Act (contd.)

(v)Though the Act formally provides for the appointment

of auditors by shareholders, in practice they work
more closely with the company management.
Shareholders hardly have a chance to interact with the
auditors.
 THE CONFEDERATION OF INDIAN
INDUSTRY’S INITIATIVE

● In 1996, the Confederation of Indian Industry (CII)

took a special initiative on Corporate Governance, the
first ever institutional initiative in Indian industry. This
initiative by CII flowed from public concerns regarding
the protection of investors interest, especially of 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.
 THE CONFEDERATION OF INDIAN
INDUSTRY’S INITIATIVE (contd.)

● A National Task Force that was set up with Mr.Rahul

Bajaj, past President of CII as the Chairman and
members from industry, the legal profession, media and
academia, presented the draft guidelines and the Code
of Corporate Governance in April 1997 at the National
Conference and Annual Session of CII.
 The Confederation of Indian Industry’s
Initiative (contd.)

● The CII has pioneered the concept of corporate

governance in India and has been internationally
recognised as one of the best in the world.

These are:
 Recommendations of the CII’s Code of
Corporate Governance
1. A single board, if it performs well, can maximise
long-term shareholder value. The board should meet
at least six times a year, preferably at intervals of 2
months.
2. A listed company with a turnover of Rs.100 crores and
above should have professionally competent and
recognised independent non-executive 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.
 Recommendations of the CII’s Code of
corporate governance (contd.)
3. A person should not hold directorships in more than
10 listed companies.

4. For non-executive directors to play a significant role

in corporate decision making and maximising long
term shareholder value they need to

● become active participants in boards and not passive

advisors;
● have clearly defined responsibilities within the board
such as the Audit Committee; and
● know how to read a balance sheet, profit and loss
account, cash flow statements, and financial ratios
and have some knowledge of various company laws.
 Recommendations of the CII’s Code of
Corporate Governance (contd.)

5. 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.

6. While re-appointing members of the board, companies

should give the attendance record of the concerned
directors.
 Recommendations of the CII’s Code of
Corporate Governance (contd.)
7. 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;
● Internal audit reports including cases of theft and
dishonesty of a material nature;
● Fatal or serious accidents, dangerous occurrence, 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;
 Recommendations of the CII’s Code of
Corporate Governance (contd.)
● Defaults such as non-payments of the principal on any
company or materially substantial non-payments for
goods sold by 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 senor 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 and
● Quarterly details of foreign exchange exposure and
the steps taken by management to limit the risks of
adverse exchange rate movement, if material.
 Recommendations of the CII’s Code of
Corporate Governance (contd.)

8. For all companies with paid-up capital of Rs.20 crores

or more the quality and quantity of disclosure that
accompanies a GDR issue should be the norm for any
domestic issue.

9 Companies that default on fixed deposits should not

be permitted to accept further deposits and make
inter-corporate loans or investments or declare
dividends until the default is made good.
 Recommendations of the CII’s Code of
Corporate Governance (contd.)
11. Major Indian Stock Exchanges should insist upon a
compliance certificate, signed by the CEO and the CFO
which should clearly state:
● The company will continue business in the course of
the following year;
● The accounting policies and principles conform to the
standard practice;
● The management is responsible for the preparation,
integrity and fair presentation of financial statements
and other information contained in the Annual Report.
● The board has overseen the company’s system of
internal accounting and administrative controls either
directly or through its Audit Committee.
 SEBI’s Initiatives
● The Securities and Exchange Board of India
(SEBI) appointed a committee on corporate
governance on May 7, 1999, with eighteen
members under the Chairmanship of Kumar
Mangalam Birla to promoting and raising the
standards of corporate governance.
 Kumar Mangalam Birla Committee

● The Committee’s recommendations consisted

of (i) mandatory recommendations, and (ii)
non-mandatory recommendations.
 Mandatory Recommendations
1. Applicability
● Applicable to all listed companies with paid-up share
capital of Rs. 3 crore and above

2. Board of directors
● The Board of Directors of a company must have an
optimum combination of executive and non-executive
Directors. The number of independent Directors
should be at least one-third in case the company has a
non-executive Chairman and at least half of the Board
in case the company has an executive Chairman.
 Mandatory Recommendations (contd.)

3. Audit Committee

The Audit Committee should have a minimum 3

members.

The Chairman should be an independent Director and

must be present at the Annual General Meeting to
answers shareholders’ queries.
 Remuneration Committee of the Board

The Board of Directors should decide the remuneration

of non-executive directors.

Full disclosure of the remuneration package of all the

directors covering salary benefits, bonuses, stock
options, pension fixed component, performance linked
incentives along with the performance criteria, service
contracts, notice period, severance fees, etc., is to be
made in the section on corporate governance of the
annual report.
 Board Procedures

● The Board meeting should be held at least four

times a year with a maximum time gap of four
months between any two meetings.
 Management

● Management discussions and analysis

report covering industry structure,
opportunities and threats, segment-wise
or product-wise performance outlook,
risks, internal control systems, etc. are to
form a part of Directors Report or as an
addition thereto.
 Shareholders

● In case of appointment of a new Director or

re-appointment of existing Director, information
containing a brief resume, nature of expertise in
specific functional areas and companies in which
the person holds Directorship, Committee
Membership, must be provided to the benefit of
shareholders.
 Shareholders (contd.)

● A Board committee under the chairmanship of a

non-executive director is to be formed to
specifically look into the redressing of
shareholder complaints of declared dividends etc.
 Shareholders (contd.)
● In order to expedite the process of share
transfers, the Board should delegate the power of
share transfer to an officer or a committee or to
the Registrar and share transfer agents with a
direction to the delegated authority to attend to
share transfer formalities at least once in a
fortnight.
 Non-mandatory Recommendations

1. Chairman of the Board

The Chairman’s role should in

principle be different from that of the
Chief Executive, though the same
executive can perform both the roles.
Non-mandatory Recommendations (contd.)

2. Remuneration Committee

The Board of Directors should set up a

Remuneration Committee to determine on their
behalf and on behalf of the shareholders with
agreed terms of reference the company’s policy
on specific remuneration packages for executive
directors including pension rights and any other
compensation payment.
Non-mandatory Recommendations (contd.)

3. Shareholders’ Rights

Half-yearly declaration of financial performance

including summary of the significant events in the
six months should be sent to each of the
shareholders.

4. Postal Ballot
NARESH CHANDRA COMMITTEE REPORT,
2002
The Naresh Chandra Committee was appointed as a
High Level Committee to examine various corporate
governance issues by the Department of Company
Affairs on 21st August, 2002. The Committee’s
recommendations mainly concerned: (i) The Auditor –
Company relationship; (ii) disqualifications for audit
assignments; (iii) List of prohibited non-audit services;
(iv) Independence standards for consulting; (v)
Compulsory audit partner rotation; (vi) Auditor’s
disclosure of contingent liabilities; (vii) Auditor’s
disclosure of qualifications and consequent action;
NARESH CHANDRA COMMITTEE REPORT,
2002 (contd.)
(viii) Managements certification in the event of
auditor’s replacement; (ix) Auditor’s annual
certification of independence; (x) Appointment of
Auditors; (xi) Certification of annual audited accounts
by CEO and CFO; (xii) Auditing the Auditors; (xiii)
Setting up of the independent Quality Review Board;
(xiv) Proposed disciplinary mechanism for auditors;
(xv) Independent Directors; (xvi) Audit Committee
Charter; (xvii) Exempting non-executive directors from
certain liabilities; (xvii) Training of independent
directors; (xix) Establishment of Corporate Serious
Fraud Office; (xx) SEBI and Subordinate Legislation
 The committee has further
recommended
● Tightening of the noose around the auditors by asking
them to make an array of disclosures,
● Called upon CEOs and CFOs of all listed companies to
certify their companies’ annual accounts, besides
suggesting
● Setting up of quality review boards by the Institute of
Chartered Accountants of India (ICAI), Institute of
Company Secretaries of India and the Institute of
Cost and Works Accountants of India, instead of a
Public Oversight Board similar to the one in the United
States.
 Rationale for a Review of the
Birla Code
● In the perception of SEBI, there was a need to appoint a
committee as a follow-up of the Birla Committee’s
report and the experience gained from the analysis of
compliance reports.
 Rationale for a Review of the
Birla Code (contd.)
● SEBI, therefore, set out to form another committee with
the twin perspectives: (a) to evaluate the adequacy of
the existing practices, and (b) to further improve them.
This committee on corporate governance was
constituted under the chairmanship of N.R. Narayana
Murthy, Chairman and Chief Mentor of Infosys
Technologies Ltd. and comprised representatives from
stock exchanges, chambers of commerce, investors
associations and professional bodies.
 NARAYANA MURTHY COMMITTEE
REPORT, 2003

The Committee on Corporate Governance set up by

SEBI under the Chairmanship of N.R.Narayana
Murthy which submitted its Report in February,
2003
NARAYANA MURTHY COMMITTEE REPORT,
2003 (contd.)

The Committee’s report expresses its total

concurrence with the recommendations contained in
the Naresh Chandra Committee’s report on
● Disclosure of contingent liabilities
● Certification by CEO and CFO
● Definition of independent directors
● Independence of audit committees
 Mandatory Recommendations

Audit Committee:

An Audit Committee is the bedrock of quality

governance.

The Committee recommended a bigger role for

the audit committee.
Narayana Murthy’s Committee has not taken a
view on rotation of auditors

Related Party Transactions

A statement of all transactions with related

parties including their bases should be placed
before the audit committee for formal
approval/ratification
Proceeds from Initial Public Offerings

Companies raising money through initial public

offering should disclose to the audit committee
the uses and application of funds under major
heads on a quarterly basis.
 Risk Management

● The Committee has deemed it necessary for the

boards of companies to be fully aware of the risks
involved in the business and that it is also
important for shareholders to know about the
process by which companies manage their
business risks. The mandatory recommendations
in this regard are:
 Risk Management (contd.)

● “Procedures should be in place to inform board

members about the risk assessment and
minimisation procedures. These procedures
should be periodically reviewed to ensure that
executive management controls risks through
means of a properly defined framework.”
 Risk Management (contd.)

● 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 minimise such
risks and any limitation to the risk-taking capacity
of the corporations. The board should formally
approve this document.
 Code of Conduct

● The Committee has recommended that it should

be obligatory for the board of a company to lay
down a code of conduct for all board members
and senior management of the company. This
code should be posted on the company’s website
 Nominee Directors

● The Committee recommended doing away with

nominee directors. If a corporation wishes to
appoint a director on the board, such appointment
should be made by the shareholders. The
Committee insisted that an institutional director, if
appointed, shall have the same responsibilities and
shall be subject to the same liabilities as any other
director. Nominees of the Government on public
sector companies shall be similarly elected and
shall be subject to the same responsibilities and
liabilities as other directors.
 Other mandatory recommendations are:

● Compensation to non-executive directors (to be

approved by the shareholders in general meeting;

● Whistle blower policy to be in place in a company.

 Dr.J.J. Irani Committee Report on Company Law,
2005
Appointed in December 2004. It submitted its Report in
May 2004. The committee recommended: (i) One-third
of the Board of listed company should be independent
directors, should be independent directors, (ii)
Corporates should be allowed to maintain pyramidal
structure, ie, a subsidiary of a holding company itself be
a holding company; (iii) Full liberty to shareholders to
do decide to issues; (iv) Mooted the concept of single
person company; (v) companies encouraged to
self-regulate their affairs; (vi) Provided Stringent
penalties for wrongdoers and recommended publication
of the punishment; (vii) Suggested continuation of
Audit and Accounting standards of ICAI; and (viii)
Present governance standards to continue.
 CONCLUSION

● Although India has been fortunate in not having

to go through the massive corporate failures such
as Enron and Worldcom, it has not been wanting
in its resolve to incorporate better governance
practices in the country’s corporates emulating
stringent international standards.
 CONCLUSION (contd.)

● However, as the Naresh Chandra Committee on

Corporate Audit and Governance pointed out: “There is
scope for improvement. For one, while India may have
excellent rules and regulations, regulatory authorities
are inadequately staffed and lack sufficient number of
skilled people. This has led to less than credible
enforcement. Delays in courts compound the problem.
For another, India has had its fair share of corporate
scams and stock market scandals that has shaken
investor confidence. Much can be done to improve the
situation”.