SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy. Based on the recommendations of the Committee and public comments received, certain amendments were made in Clause 49 of the Listing Agreement, vide circular dated August 26, 2003.

SEBI convened another meeting of the Narayana Murthy committee on Corporate Governance be convened on November 17, 2003 for deliberating the suggestions and representations received after the issuance of the aforesaid circular.

The committee has since submitted its report to SEBI. The report proposes certain amendments in the revised clause 49 which was issued vide circular dated 26^th August 2003. The report is reproduced below for seeking public comments.

Explanation (i): For the purpose of this clause, the expression ‘independent director’ shall mean non-executive director of the company who:

Explanation (i)(e) restricts any supplier, service provider or customer of the company from being an independent director on the board of the company. This clause should ideally only bar persons who are material suppliers, service providers or customers and not extend it to any and all suppliers, service providers or customers.

This view is further supported by the fact that Explanation (i)(a) does not disqualify a non-executive director who has an immaterial pecuniary relationship or transaction with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies from serving as an independent director.

It is therefore proposed that the word "material" be inserted before supplier, in Explanation (i)(e) to Clause I.A.

1. Associated company shall mean a company which is an "associate" as defined in Accounting Standard (AS) 23, "Accounting for Investments in Associates in Consolidated Financial Statements", issued by the Institute of Chartered Accountants of India.
2. Senior management shall have the meaning as prescribed in the explanation to clause VII(E).
3. "Relative" shall mean "relative" as defined in section 2(41) and section 6 of the Companies Act, 1956.

Explanation (ii) : Institutional directors on the boards of companies shall be considered as independent directors whether the institution is an investing institution or a lending institution.

1. The explanation does not make it clear that even an institutional director must in order to be considered as independent, satisfy the tests laid down in clauses (a) to (f).
2. It is also necessary to clarify that institutional directors have the same rights, duties and responsibilities as any other member of the board.

1. There shall be no nominee directors. Where an institution wishes to appoint a director on the Board, such appointment should be made by the shareholders.
2. An institutional director on the boards of companies shall be considered as an independent director unless he does not satisfy the requirements of any of the clauses (a) to (f) listed above.
3. An institutional director shall have the same rights, duties and responsibilities as other members of the board and as prescribed under the Companies Act, 1956 and the Listing regulations.
4. Nominee of the Government on public sector companies shall be similarly elected

and shall be subject to the same responsibilities and liabilities as other directors.

Clause I.B(i) – All remuneration paid to non-executive directors shall be fixed by the Board of Directors and shall be approved by shareholders in general meeting. Limits shall be set for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate. The stock options granted to the non-executive directors shall vest after a period of at least one year from the date such non-executive directors have retired from the Board of the Company.

Clauses I.B(ii) and I.C(ii) – The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non-executive director

It is recommended that a clarification be added to state that non-executive directors include independent director. This will ensure clarity in drafting.

As a result of this, clauses I.B(ii) and I.C(ii) become redundant and should be deleted.

49 I.B(i) All remuneration paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall be agreed to by shareholders in general meeting. Limits shall be set for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. The stock options granted to the non-executive directors, including independent directors, shall vest after a period of at least one year from the date of grant of the stock options. This requirement shall apply prospectively to all new option grants made after the effective date of this circular.

The board as a whole should have the responsibility to periodically review legal compliance reports prepared by the company as well as the steps taken to cure any instances of non-compliance.

A director is an officer of the company and the term "officer who is in default" has already been defined in section 2(31) and section 5 of the Companies Act, 1956. It is therefore not necessary to make any further provision in this respect and the second sentence to clause I(C)(i) may be deleted.

There is currently a shortage of independent directors. The Companies Act, 1956 prescribes in section 277 that a person cannot hold more than 15 directorships and section 278 provides that in considering the limit, directorship as an alternate director should be excluded, whereas the clause restricts committee memberships to 10. Therefore, independent directors who would otherwise be willing to serve on such committees are unable to do so.

The formation of a remuneration committee is not mandatory and it meets only occasionally. It is therefore suggested that for the purposes of the calculation of the limit, only the audit committee and the shareholders’ grievance committee should be counted.

The existing language in clause I.F(i) would require that no non-whole time director can continue as a director beyond a period of three consecutive terms of three years each, i.e. a total of nine years. This may create practical problems as it may prevent promoters and directors protecting their interests from continuing on the board even while the promoters’ investment in the company continues. It may also prevent the continuance on the board of other individuals, who may be making a significant contribution as a board member and whose continuance on the board may be in the interest of the company.

It can however be argued that long association with the company may be perceived as impairing the independence of a director. It may therefore be provided that where an individual continues on the board beyond the prescribed term of nine years, he shall no longer be considered as an independent director.

It is also necessary that this provision be made prospective, i.e. it should apply to a period of nine years in the aggregate, such period to commence on or after the date the amended clause 49 comes into force. It is therefore necessary that this clause be amended as follows:

It may not be practical for the Chairman of the Audit Committee to be present at all annual general meetings to answer shareholder queries due to various reasons, including travel, ill health, etc. it is therefore recommended that in his absence, another member of the audit committee, who is an independent director may be present to answer shareholder queries.

Clause II.D(i) requires that the audit committee should have an oversight of the disclosure of financial information. A listed company is required to publish quarterly financial results and annual financial statements. It is therefore necessary that the audit committee should meet at least four times in a year.

1. 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.
2. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to the board, focusing primarily on;

1. Any changes in accounting policies and practices.
2. Major accounting entries based on exercise of judgment by management.
3. Qualifications in draft audit report.
4. Significant adjustments arising out of audit.
5. The going concern assumption.
6. Compliance with accounting standards.
7. Compliance with stock exchange and legal requirements concerning financial statements
8. Any related party transactions

4. Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
5. 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.
6. Discussion with internal auditors any significant findings and follow up there on.
7. 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.
8. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
9. Reviewing the company’s financial and risk management policies.
10. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

Section 217(2AA) of the Companies Act, 1956 requires that the Board’s report should include a Director’s Responsibility Statement which covers many of the items covered in this clause. To ensure consistency, it is necessary to reword some of the clauses.

1. 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.
2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the external auditor and the fixation of audit fees.
3. Approval of payment to external auditors for any other services rendered by the external auditors.
4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to:

1. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause 2AA of section 217 of the Companies Act, 1956
2. Changes, if any, in accounting policies and practices and reasons for the same
3. Major accounting entries involving estimates based on the exercise of judgment by management
4. Significant adjustments made in the financial statements arising out of audit findings
5. Compliance with listing and other legal requirements relating to financial statements
6. Disclosure of any related party transactions
7. Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval
6. Reviewing, with the management, external and internal auditors, adequacy of the internal control systems.
7. 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.
8. Discussion with internal auditors any significant findings and follow up there on.
9. 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.
10. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
11. Reviewing the company’s financial and risk management policies.
12. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

1. Financial statements and draft audit report, including quarterly / half-yearly financial information;
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory / internal auditors; and
5. Records of related party transactions
6. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee

The requirement in sub-clause 1 is already covered in clause I.D and should be deleted

It is not practical to expect audit committees to review the records of related party transactions. It should be sufficient if management places before the audit committee for review, a statement of significant related party transactions and gives details of related party transactions that are not at an arm’s length basis with reasons for the same.

Clause VII provides that risk management procedures should be reviewed by the Board. Therefore, there is no need for the audit committee to also perform this review.

1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the audit committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the external auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee.

A. Disclosure of Accounting Treatment

In case it has followed a treatment different from that prescribed in an Accounting Standards, management shall justify why they believe such alternative treatment is more representative of the underlined business transactions. Management shall also clearly explain the alternative accounting treatment in the footnote of financial statements.

Where an accounting standard is not followed, the auditor is required to disclose that fact and qualify his report. What is proposed, in addition, is that management should provide an explanation in a note to the financial statements as to the fact that an accounting standard is not followed and the reason for the departure. The language in the clause does not bring this out.

Since this is a matter of disclosure, it would be more appropriate to delete this clause and include an amended clause under clause VII as sub-clause (AA)

AA. Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlined business transaction.

1. Personnel who observe an unethical or improper practice (not necessarily a violation of law) shall be able to approach the audit committee without necessarily informing their supervisors.
2. Companies shall 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 shall contain provisions protecting "whistle blowers" from unfair termination and other unfair prejudicial employment practices.
3. Company shall annually 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.
4. Such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report.
5. The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the Audit Committee.

The intention of this clause is that management establishes a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. The exact details of such a mechanism should be left to each company, through its Board of Directors, to decide but the existence and implementation must be reviewed by the audit committee. The mechanism must have adequate provisions to ensure there is no victimization of employees who avail of this procedure. The clause may be reworded accordingly.

1. The company will establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.
2. The mechanism must provide for adequate safeguards against victimization of employees who avail of the mechanism.
3. The mechanism must also provide, where senior management is involved, direct access to the Chairman of the Audit Committee.
4. The existence of the mechanism must be appropriately communicated within the organization.
5. The Audit Committee must periodically review the existence and functioning of the mechanism.

Clause IV.A(v) dealing with the audit committee review of the appointment, removal and terms of remuneration of the Chief Internal Auditor should be deleted since this is a repetition of clause II.E.6 of clause 49. This ensures absence of redundant language.

It has been pointed out that the implementation of this clause may create the following practical difficulties:

1. Subsidiaries are often of small size and it may be too onerous if all the provisions regarding the composition of the board as applicable to a holding company are made applicable to every subsidiary. There may also be difficulties in applying this clause to joint ventures, when the composition of the board may be determined by the joint venture agreement.
2. Where there are a large number of subsidiaries, independent directors on the board of the parent company may not be willing to become directors on the board of a subsidiary, particularly where such a directorship is included in the number of directorships to which the ceiling prescribed under the Companies Act, 1956 applies.
3. It may be very expensive for a company if the independent director is required to attend board meetings of foreign subsidiaries

At the same time, it needs to be appreciated that the intention in formulating this clause was the need for the board of the holding company to have some independent link with the board of the subsidiary and provide necessary oversight.

It is therefore suggested that the clause may be revised as under:

1. The provisions of sub-clause (ii), which provide that at least one independent director in the holding company shall be a director of the subsidiary company shall apply only to material Indian subsidiaries i.e. subsidiaries whose turnover or net worth in the immediately preceding year exceeds 20% of the consolidated turnover or consolidated net worth respectively, of the holding company and its subsidiaries.
2. There should be an obligation on the part of the management to bring to the attention of the board of the holding company significant transactions and arrangements entered into by the subsidiary companies. For this purpose, "significant transaction and arrangement" shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities of the company, as the case may be, in the immediately preceding year.

Clause V (v) pertaining to a disclosure of the review of affairs of a subsidiary company by the board of the parent company should be deleted since it is superfluous. This aspect is already covered in clauses V(iii) and V(iv).

3. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

The disclosure of contingent liabilities is already required under Schedule VI to the Companies Act, 1956. It is also impractical for auditors to comment on management’s views and any such view/comment may be construed as an admission of the liability, which may be detrimental to the interests of the shareholders. It is therefore suggested that this clause be deleted.

Delete clause VI(i) in its entirety.

It may be cumbersome and unnecessary for the audit committee to review all transactions with related parties which are in the ordinary course of business. It should therefore be sufficient if these transactions are placed periodically in a summary form before the audit committee.

It is however necessary that material individual transactions which are not in the normal course of business are placed before the audit committee. It is also necessary that management identify and place before the audit committee, material individual transactions, whether in the normal course of business or otherwise, with related parties or others which are not on an arm’s length basis, together with a justification for the same.

The compliance officer of a company may not be the right person to attest/certify disclosure of the business risks faced by a company. It is recommended that this requirement be deleted.

Delete clause VII.B(i) in its entirety.

The current language in clause 49 requires companies to disclose use of IPO proceeds without specifying any time limitation. It is recommended that clause 49 be amended to ensure this disclosure is required only till funds are spent. There is no reason why this provision should apply only to an IPO and not be made applicable to all public offerings.

Further, funds utilised for purposes other than that for which they were raised should be placed before the audit committee.

When money is raised through an issue to public (including public issues, rights issues), 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 and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter.

It is recommended that the disclosure of remuneration provided to directors should be aggregated by major category and disclosed. This will facilitate a robust disclosure of director’s remuneration.

Clause VII.E requires management to disclose to the board details of transactions where they have personal interests. It is recommended to change "Management" to "Senior management" as follows, to make the language tighter and more precise.

9. Clause (f) which deals with two separate matters viz. (i) internal control and (ii) accounting policies should be split into two clauses as changes an internal control cannot be disclosed in the notes to the financial statements.

The CEO (either the Executive Chairman or the Managing Director or Manager) and the CFO (either the whole-time Finance Director or any other person heading the Finance function) discharging that function shall certify to the Board that:

1. They have reviewed financial statements and the cash flow statement and the Directors’ Report and that to the best of their knowledge and belief :

1. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
2. these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

2. There are to the best of their knowledge and belief, no transactions entered into by the company which are fraudulent, illegal or violative of the company’s code of conduct or ethics policy.
3. They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.
4. They have indicated to the auditors and the Audit committee

1. significant changes in internal control during the year;
2. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the involvement, if any, of the management or an employee having a significant role in the company’s internal control system.

With effect from June 15, 2001, section 192A was introduced in the Companies Act, 1956 providing for the passing of resolutions by postal ballot. Since this is now part of law, it is suggested that paragraph 4 of Annexure 1C be deleted.

SEBI convened deliberating theafter the issuance of the aforesaid circular. SEBI hosted aforesaid in its The commentsin its meeting held on

The committee has since submitted its report to SEBI. The report is reproduced below for seeking public comments.*****

Explanation (i): For the purpose of this clause, the expression ‘independent director’ shall mean non-executive director of the company who:

Explanation (i)(e) restricts any supplier, service provider or customer of the company from being an independent director on the board of the company. This clause should ideally only bar persons who are material suppliers, service providers or customers and not extend it to any and all suppliers, service providers or customers.

This view is further supported by the fact that Explanation (i)(a) does not disqualify a non-executive director who has an immaterial pecuniary relationship or transaction with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies from serving as an independent director.

It is therefore proposed that the word "material" be inserted before supplier, in Explanation (i)(e) to Clause I.A.

1. Associated company shall mean a company which is an "associate" as defined in Accounting Standard (AS) 23, "Accounting for Investments in Associates in Consolidated Financial Statements", issued by the Institute of Chartered Accountants of India.
2. Senior management shall have the meaning as prescribed in the explanation to clause VII(E).
3. "Relative" shall mean "relative" as defined in section 2(41) and section 6 of the Companies Act, 1956.

Explanation (ii) : Institutional directors on the boards of companies shall be considered as independent directors whether the institution is an investing institution or a lending institution.

1. The explanation does not make it clear that even an institutional director must in order to be considered as independent, satisfy the tests laid down in clauses (a) to (f).
2. It is also necessary to clarify that institutional directors have the same rights, duties and responsibilities as any other member of the board.

1. There shall be no nominee directors. Where an institution wishes to appoint a director on the Board, such appointment should be made by the shareholders.
2. An institutional director on the boards of companies shall be considered as an independent director unless he does not satisfy the requirements of any of the clauses (a) to (f) listed above.
3. An institutional director shall have the same rights, duties and responsibilities as other members of the board and as prescribed under the Companies Act, 1956 and the Listing regulations.
4. Nominee of the Government on public sector companies shall be similarly elected

and shall be subject to the same responsibilities and liabilities as other directors.

Clause I.B(i) – All remuneration paid to non-executive directors shall be fixed by the Board of Directors and shall be approved by shareholders in general meeting. Limits shall be set for the maximum number of stock options that can be granted to non-executive directors in any financial year and in aggregate. The stock options granted to the non-executive directors shall vest after a period of at least one year from the date such non-executive directors have retired from the Board of the Company.

Clauses I.B(ii) and I.C(ii) – The considerations as regards remuneration paid to an independent director shall be the same as those applied to a non-executive director

It is recommended that a clarification be added to state that non-executive directors include independent director. This will ensure clarity in drafting.

As a result of this, clauses I.B(ii) and I.C(ii) become redundant and should be deleted.

49 I.B(i) All remuneration paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall be agreed to by shareholders in general meeting. Limits shall be set for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. The stock options granted to the non-executive directors, including independent directors, shall vest after a period of at least one year from the date of grant of the stock options. This requirement shall apply prospectively to all new option grants made after the effective date of this circular.

The board as a whole should have the responsibility to periodically review legal compliance reports prepared by the company as well as the steps taken to cure any instances of non-compliance.

A director is an officer of the company and the term "officer who is in default" has already been defined in section 2(31) and section 5 of the Companies Act, 1956. It is therefore not necessary to make any further provision in this respect and the second sentence to clause I(C)(i) may be deleted.

There is currently a shortage of independent directors. The Companies Act, 1956 prescribes in section 277 that a person cannot hold more than 15 directorships and section 278 provides that in considering the limit, directorship as an alternate director should be excluded, whereas the clause restricts committee memberships to 10. Therefore, independent directors who would otherwise be willing to serve on such committees are unable to do so.

The formation of a remuneration committee is not mandatory and it meets only occasionally. It is therefore suggested that for the purposes of the calculation of the limit, only the audit committee and the shareholders’ grievance committee should be counted.

The existing language in clause I.F(i) would require that no non-whole time director can continue as a director beyond a period of three consecutive terms of three years each, i.e. a total of nine years. This may create practical problems as it may prevent promoters and directors protecting their interests from continuing on the board even while the promoters’ investment in the company continues. It may also prevent the continuance on the board of other individuals, who may be making a significant contribution as a board member and whose continuance on the board may be in the interest of the company.

It can however be argued that long association with the company may be perceived as impairing the independence of a director. It may therefore be provided that where an individual continues on the board beyond the prescribed term of nine years, he shall no longer be considered as an independent director.

It is also necessary that this provision be made prospective, i.e. it should apply to a period of nine years in the aggregate, such period to commence on or after the date the amended clause 49 comes into force. It is therefore necessary that this clause be amended as follows:

It may not be practical for the Chairman of the Audit Committee to be present at all annual general meetings to answer shareholder queries due to various reasons, including travel, ill health, etc. it is therefore recommended that in his absence, another member of the audit committee, who is an independent director may be present to answer shareholder queries.

Clause II.D(i) requires that the audit committee should have an oversight of the disclosure of financial information. A listed company is required to publish quarterly financial results and annual financial statements. It is therefore necessary that the audit committee should meet at least four times in a year.

1. 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.
2. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services.
3. Reviewing with management the annual financial statements before submission to the board, focusing primarily on;

1. Any changes in accounting policies and practices.
2. Major accounting entries based on exercise of judgment by management.
3. Qualifications in draft audit report.
4. Significant adjustments arising out of audit.
5. The going concern assumption.
6. Compliance with accounting standards.
7. Compliance with stock exchange and legal requirements concerning financial statements
8. Any related party transactions

4. Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
5. 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.
6. Discussion with internal auditors any significant findings and follow up there on.
7. 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.
8. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
9. Reviewing the company’s financial and risk management policies.
10. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

Section 217(2AA) of the Companies Act, 1956 requires that the Board’s report should include a Director’s Responsibility Statement which covers many of the items covered in this clause. To ensure consistency, it is necessary to reword some of the clauses.

1. 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.
2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the external auditor and the fixation of audit fees.
3. Approval of payment to external auditors for any other services rendered by the external auditors.
4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to:

1. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause 2AA of section 217 of the Companies Act, 1956
2. Changes, if any, in accounting policies and practices and reasons for the same
3. Major accounting entries involving estimates based on the exercise of judgment by management
4. Significant adjustments made in the financial statements arising out of audit findings
5. Compliance with listing and other legal requirements relating to financial statements
6. Disclosure of any related party transactions
7. Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval
6. Reviewing, with the management, external and internal auditors, adequacy of the internal control systems.
7. 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.
8. Discussion with internal auditors any significant findings and follow up there on.
9. 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.
10. Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
11. Reviewing the company’s financial and risk management policies.
12. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

1. Financial statements and draft audit report, including quarterly / half-yearly financial information;
2. Management discussion and analysis of financial condition and results of operations;
3. Reports relating to compliance with laws and to risk management;
4. Management letters / letters of internal control weaknesses issued by statutory / internal auditors; and
5. Records of related party transactions
6. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee

The requirement in sub-clause 1 is already covered in clause I.D and should be deleted

It is not practical to expect audit committees to review the records of related party transactions. It should be sufficient if management places before the audit committee for review, a statement of significant related party transactions and gives details of related party transactions that are not at an arm’s length basis with reasons for the same.

Clause VII provides that risk management procedures should be reviewed by the Board. Therefore, there is no need for the audit committee to also perform this review.

1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the audit committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the external auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee.

A. Disclosure of Accounting Treatment

In case it has followed a treatment different from that prescribed in an Accounting Standards, management shall justify why they believe such alternative treatment is more representative of the underlined business transactions. Management shall also clearly explain the alternative accounting treatment in the footnote of financial statements.

Where an accounting standard is not followed, the auditor is required to disclose that fact and qualify his report. What is proposed, in addition, is that management should provide an explanation in a note to the financial statements as to the fact that an accounting standard is not followed and the reason for the departure. The language in the clause does not bring this out.

Since this is a matter of disclosure, it would be more appropriate to delete this clause and include an amended clause under clause VII as sub-clause (AA)

AA. Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlined business transaction.

1. Personnel who observe an unethical or improper practice (not necessarily a violation of law) shall be able to approach the audit committee without necessarily informing their supervisors.
2. Companies shall 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 shall contain provisions protecting "whistle blowers" from unfair termination and other unfair prejudicial employment practices.
3. Company shall annually 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.
4. Such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report.
5. The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the Audit Committee.

The intention of this clause is that management establishes a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. The exact details of such a mechanism should be left to each company, through its Board of Directors, to decide but the existence and implementation must be reviewed by the audit committee. The mechanism must have adequate provisions to ensure there is no victimization of employees who avail of this procedure. The clause may be reworded accordingly.

1. The company will establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.
2. The mechanism must provide for adequate safeguards against victimization of employees who avail of the mechanism.
3. The mechanism must also provide, where senior management is involved, direct access to the Chairman of the Audit Committee.
4. The existence of the mechanism must be appropriately communicated within the organization.
5. The Audit Committee must periodically review the existence and functioning of the mechanism.

Clause IV.A(v) dealing with the audit committee review of the appointment, removal and terms of remuneration of the Chief Internal Auditor should be deleted since this is a repetition of clause II.E.6 of clause 49. This ensures absence of redundant language.

It has been pointed out that the implementation of this clause may create the following practical difficulties:

1. Subsidiaries are often of small size and it may be too onerous if all the provisions regarding the composition of the board as applicable to a holding company are made applicable to every subsidiary. There may also be difficulties in applying this clause to joint ventures, when the composition of the board may be determined by the joint venture agreement.
2. Where there are a large number of subsidiaries, independent directors on the board of the parent company may not be willing to become directors on the board of a subsidiary, particularly where such a directorship is included in the number of directorships to which the ceiling prescribed under the Companies Act, 1956 applies.
3. It may be very expensive for a company if the independent director is required to attend board meetings of foreign subsidiaries

At the same time, it needs to be appreciated that the intention in formulating this clause was the need for the board of the holding company to have some independent link with the board of the subsidiary and provide necessary oversight.

It is therefore suggested that the clause may be revised as under:

1. The provisions of sub-clause (ii), which provide that at least one independent director in the holding company shall be a director of the subsidiary company shall apply only to material Indian subsidiaries i.e. subsidiaries whose turnover or net worth in the immediately preceding year exceeds 20% of the consolidated turnover or consolidated net worth respectively, of the holding company and its subsidiaries.
2. There should be an obligation on the part of the management to bring to the attention of the board of the holding company significant transactions and arrangements entered into by the subsidiary companies. For this purpose, "significant transaction and arrangement" shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities of the company, as the case may be, in the immediately preceding year.

Clause V (v) pertaining to a disclosure of the review of affairs of a subsidiary company by the board of the parent company should be deleted since it is superfluous. This aspect is already covered in clauses V(iii) and V(iv).

3. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

The disclosure of contingent liabilities is already required under Schedule VI to the Companies Act, 1956. It is also impractical for auditors to comment on management’s views and any such view/comment may be construed as an admission of the liability, which may be detrimental to the interests of the shareholders. It is therefore suggested that this clause be deleted.

Delete clause VI(i) in its entirety.

It may be cumbersome and unnecessary for the audit committee to review all transactions with related parties which are in the ordinary course of business. It should therefore be sufficient if these transactions are placed periodically in a summary form before the audit committee.

It is however necessary that material individual transactions which are not in the normal course of business are placed before the audit committee. It is also necessary that management identify and place before the audit committee, material individual transactions, whether in the normal course of business or otherwise, with related parties or others which are not on an arm’s length basis, together with a justification for the same.

The compliance officer of a company may not be the right person to attest/certify disclosure of the business risks faced by a company. It is recommended that this requirement be deleted.

Delete clause VII.B(i) in its entirety.

The current language in clause 49 requires companies to disclose use of IPO proceeds without specifying any time limitation. It is recommended that clause 49 be amended to ensure this disclosure is required only till funds are spent. There is no reason why this provision should apply only to an IPO and not be made applicable to all public offerings.

Further, funds utilised for purposes other than that for which they were raised should be placed before the audit committee.

When money is raised through an issue to public (including public issues, rights issues), 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 and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter.

It is recommended that the disclosure of remuneration provided to directors should be aggregated by major category and disclosed. This will facilitate a robust disclosure of director’s remuneration.

Clause VII.E requires management to disclose to the board details of transactions where they have personal interests. It is recommended to change "Management" to "Senior management" as follows, to make the language tighter and more precise.

9. Clause (f) which deals with two separate matters viz. (i) internal control and (ii) accounting policies should be split into two clauses as changes an internal control cannot be disclosed in the notes to the financial statements.

The CEO (either the Executive Chairman or the Managing Director or Manager) and the CFO (either the whole-time Finance Director or any other person heading the Finance function) discharging that function shall certify to the Board that:

1. They have reviewed financial statements and the cash flow statement and the Directors’ Report and that to the best of their knowledge and belief :

1. these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
2. these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

2. There are to the best of their knowledge and belief, no transactions entered into by the company which are fraudulent, illegal or violative of the company’s code of conduct or ethics policy.
3. They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.
4. They have indicated to the auditors and the Audit committee

1. significant changes in internal control during the year;
2. significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and
3. instances of significant fraud of which they have become aware and the involvement, if any, of the management or an employee having a significant role in the company’s internal control system.

With effect from June 15, 2001, section 192A was introduced in the Companies Act, 1956 providing for the passing of resolutions by postal ballot. Since this is now part of law, it is suggested that paragraph 4 of Annexure 1C be deleted.