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| Shri Kumar Mangalam Birla Report of the Kumar Mangalam Birla Committee on Corporate Governance 1.1 It is almost a truism that the adequacy and the quality of corporate governance shape the growth and the future of any capital market and economy. The concept of corporate governance has been attracting public attention for quite some time in India. The topic is no longer confined to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. Progressive firms in India have voluntarily put in place systems of good corporate governance. Internationally also, while this topic has been accepted for a long time, the financial crisis in emerging markets has led to renewed discussions and inevitably focussed them on the lack of corporate as well as governmental oversight. The same applies to recent high-profile financial reporting failures even among firms in the developed economies. Focus on corporate governance and related issues is an inevitable outcome of a process, which leads firms to increasingly shift to financial markets as the pre-eminent source for capital. In the process, more and more people are recognizing that corporate governance is indispensable to effective market discipline. This growing consensus is both an enlightened and a realistic view. In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent oversight, risks its very stability and future health. As a result, the link between a company's management, directors and its financial reporting system has never been more crucial. As the boards provide stewardship of companies, they play a significant role in their efficient functioning. 1.3 Strong corporate governance is thus indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure. Without financial reporting premised on sound, honest numbers, capital markets will collapse upon themselves. 1.4 Another important aspect of corporate governance relates to issues of insider trading. It is important that insiders do not use their position of knowledge and access to inside information about the company, and take unfair advantage of the resulting information asymmetry. To prevent this from happening, corporates are expected to disseminate the material price sensitive information in a timely and proper manner and also ensure that till such information is made public, insiders abstain from transacting in the securities of the company. The principle should be ‘disclose or desist’. This therefore calls for companies to devise an internal procedure for adequate and timely disclosures, reporting requirements, confidentiality norms, code of conduct and specific rules for the conduct of its directors and employees and other insiders. For example, in many countries, there are rules for reporting of transactions by directors and other senior executives of companies, as well as for a report on their holdings, activity in their own shares and net year to year changes to these in the annual report. The rules also cover the dealing in the securities of their companies by the insiders, especially directors and other senior executives, during sensitive reporting seasons. However, the need for such procedures, reporting requirements and rules also goes beyond corporates to other entities in the financial markets such as Stock Exchanges, Intermediaries, Financial institutions, Mutual Funds and concerned professionals who may have access to inside information. This is being dealt with in a comprehensive manner, by a separate group appointed by SEBI, under the Chairmanship of Shri Kumar Mangalam Birla. 1.5 The issue of corporate governance involves besides shareholders, all other stakeholders. The Committee's recommendations have looked at corporate governance from the point of view of the stakeholders and in particular that of the shareholders and investors, because they are the raison de etre for corporate governance and also the prime constituency of SEBI. The control and reporting functions of boards, the roles of the various committees of the board, the role of management, all assume special significance when viewed from this perspective. The other way of looking at corporate governance is from the contribution that good corporate governance makes to the efficiency of a business enterprise, to the creation of wealth and to the country’s economy. In a sense both these points of view are related and during the discussions at the meetings of the Committee, there was a clear convergence of both points of view. 1.6 At the heart of the Committee's report is the set of recommendations which distinguishes the responsibilities and obligations of the boards and the management in instituting the systems for good corporate governance and emphasises the rights of shareholders in demanding corporate governance. Many of the recommendations are mandatory. For reasons stated in the report, these recommendations are expected to be enforced on the listed companies for initial and continuing disclosures in a phased manner within specified dates, through the listing agreement. The companies will also be required to disclose separately in their annual reports, a report on corporate governance delineating the steps they have taken to comply with the recommendations of the Committee. This will enable shareholders to know, where the companies, in which they have invested, stand with respect to specific initiatives taken to ensure robust corporate governance. The implementation will be phased. Certain categories of companies will be required to comply with the mandatory recommendations of the report during the financial year 2000-2001, but not later than March31, 2001, and others during the financial years 2001-2002 and 2002-2003. For the non-mandatory recommendations, the Committee hopes that companies would voluntarily implement these. It has been recommended that SEBI may write to the appropriate regulatory bodies and governmental authorities to incorporate where necessary, the recommendations in their respective regulatory or control framework. 1.7 The Committee recognised that India had in place a basic system of corporate governance and that SEBI has already taken a number of initiatives towards raising the existing standards. The Committee also recognised that the Confederation of Indian Industries had published a code entitled "Desirable Code of Corporate Governance" and was encouraged to note that some of the forward looking companies have already reviewed or are in the process of reviewing their board structures and have also reported in their 1998-99 annual reports the extent to which they have complied with the Code. The Committee however felt that under Indian conditions a statutory rather than a voluntary code would be far more purposive and meaningful, at least in respect of essential features of corporate governance. 1.8 The Committee however recognised that a system of control should not so hamstring the companies so as to impede their ability to compete in the market place. The Committee believes that the recommendations made in this report mark an important step forward and if accepted and followed by the industry, they would raise the standards in corporate governance, strengthen the unitary board system, significantly increase its effectiveness and ultimately serve the objective of maximising shareholder value. The Constitution of the Committee and the Setting for the Report 2.1 There are some Indian companies, which have voluntarily established high standards of corporate governance, but there are many more, whose practices are a matter of concern. There is also an increasing concern about standards of financial reporting and accountability, especially after losses suffered by investors and lenders in the recent past, which could have been avoided, with better and more transparent reporting practices. Investors have suffered on account of unscrupulous management of the companies, which have raised capital from the market at high valuations and have performed much worse than the past reported figures, leave alone the future projections at the time of raising money. Another example of bad governance has been the allotment of promoter’s shares, on preferential basis at preferential prices, disproportionate to market valuation of shares, leading to further dilution of wealth of minority shareholders. This practice has however since been contained. 2.2 There are also many companies, which are not paying adequate attention to the basic procedures for shareholders’ service; for example, many of these companies do not pay adequate attention to redress investors’ grievances such as delay in transfer of shares, delay in despatch of share certificates and dividend warrants and non-receipt of dividend warrants; companies also do not pay sufficient attention to timely dissemination of information to investors as also to the quality of such information. SEBI has been regularly receiving large number of investor complaints on these matters. While enough laws exist to take care of many of these investor grievances, the implementation and inadequacy of penal provisions have left a lot to be desired. 2.3 Corporate governance is considered an important instrument of investor protection, and it is therefore a priority on SEBI’s agenda. To further improve the level of corporate governance, need was felt for a comprehensive approach at this stage of development of the capital market, to accelerate the adoption of globally acceptable practices of corporate governance. This would ensure that the Indian investors are in no way less informed and protected as compared to their counterparts in the best-developed capital markets and economies of the world. 2.4 Securities market regulators in almost all developed and emerging markets have for sometime been concerned about the importance of the subject and of the need to raise the standards of corporate governance. The financial crisis in the Asian markets in the recent past have highlighted the need for improved level of corporate governance and the lack of it in certain countries have been mentioned as one of the causes of the crisis. Indeed corporate governance has been a widely discussed topic at the recent meetings of the International Organisation of Securities Commissions (IOSCO). Besides in an environment in which emerging markets increasingly compete for global capital, it is evident that global capital will flow to markets which are better regulated and observe higher standards of transparency, efficiency and integrity. Raising standards of corporate governance is therefore also extremely relevant in this context. 2.5 In the above mentioned context, the Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate Governance. The Committee’s membership is given in Annexure 1 and the detailed terms of the reference are as follows:
2.8 The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the Management. It stewards the company, sets its strategic aim and financial goals and oversees their implementation, puts in place adequate internal controls and periodically reports the activities and progress of the company in the company in a transparent manner to the stakeholders. The shareholders’ role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information ,in a transparent fashion, of the activities and progress of the company. The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of Management to it. 2.9 Crucial to good corporate governance are the existence and enforceability of regulations relating to insider information and insider trading. These matters are being currently examined separately by a Group appointed by SEBI under the Chairmanship of Shri Kumar Mangalam Birla. 2.10 Adequate financial reporting and disclosure are the corner stones of good corporate governance. These demand the existence and implementation of proper accounting standards and disclosure requirements. A separate committee appointed by SEBI under the Chairmanship of Shri Y. H. Malegam (who is also a member of this Committee) is examining these issues on a continuing basis. This Committee has advised that while in most areas, accounting standards in India are comparable with International Accounting Standards both in terms of coverage and content, there are a few areas where additional standards need to be introduced in India on an urgent basis. These matters are discussed in greater detail in para 12.1 of this report. 2.11 The Committee’s draft report was made public through the media and also put on the web site of SEBI for comments. The report was also sent to the Chambers of Commerce, financial institutions, stock exchanges, investor associations, the Association of Merchant Bankers of India, Association of Mutual funds of India, The Institute of Chartered Accountants of India, Institute of Company Secretaries of India, academicians, experts and eminent personalities in the Indian capital market, foreign investors. A copy of the draft report was also sent to Sir Adrian Cadbury who had chaired the Cadbury Committee on Corporate Governance set up by the London Stock Exchange, the Financial Reporting Council and the Accountancy Bodies in the U. K. in 1991. 2.12 The Committee has received comments from most of the above groups. Besides, Sir Adrian Cadbury, and several eminent persons in the Indian capital market, have sent detailed comments on the draft report. Separately, the Committee held meetings with the representatives of the Chambers of Commerce, Chairmen of the Financial Institutions, stock exchanges, investor associations. Thus the Committee had the benefit of the views of almost all concerned entities that have a role in corporate governance. The Committee has taken into account the views and comments of these respondents in this final report. 2.13 The Committee puts on record its appreciation of the valuable inputs and painstaking efforts of Shri Anup Srivastava, Vice-President Corporate Strategy and Business Development of the Aditya Birla Group, Shri P K Bindlish, Division Chief, SEBI, Shri Umesh Kumar, and other officers of the SMDRP department of SEBI, in the preparation of this report. The Recommendations of the Committee 3.1 This Report is the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. While making the recommendations the Committee has been mindful that any code of Corporate Governance must be dynamic, evolving and should change with changing context and times. It would therefore be necessary that this code also is reviewed from time to time, keeping pace with the changing expectations of the investors, shareholders, and other stakeholders and with increasing sophistication achieved in capital markets. Corporate Governance –the Objective 4.1 Corporate governance has several claimants –shareholders and other stakeholders - which include suppliers, customers, creditors, the bankers, the employees of the company, the government and the society at large. This Report on Corporate Governance has been prepared by the Committee for SEBI, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders. 4.2 The Committee therefore agreed that the fundamental objective of corporate governance is the "enhancement of shareholder value, keeping in view the interests of other stakeholder". This definition harmonises the need for a company to strike a balance at all times between the need to enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company. 4.3 In the opinion of the Committee, the imperative for corporate governance lies not merely in drafting a code of corporate governance, but in practising it. Even now, some companies are following exemplary practices, without the existence of formal guidelines on this subject. Structures and rules are important because they provide a framework, which will encourage and enforce good governance; but alone, these cannot raise the standards of corporate governance. What counts is the way in which these are put to use. The Committee is thus of the firm view, that the best results would be achieved when the companies begin to treat the code not as a mere structure, but as a way of life. 4.4 It follows that the real onus of achieving the desired level of corporate governance, lies in the proactive initiatives taken by the companies themselves and not in the external measures like breadth and depth of a code or stringency of enforcement of norms. The extent of discipline, transparency and fairness, and the willingness shown by the companies themselves in implementing the Code, will be the crucial factor in achieving the desired confidence of shareholders and other stakeholders and fulfilling the goals of the company. Applicability of the Recommendations Mandatory and non mandatory recommendations 5.1 The Committee debated the question of voluntary versus mandatory compliance of its recommendations. The Committee was of the firm view that mandatory compliance of the recommendations at least in respect of the essential recommendations would be most appropriate in the Indian context for the present. The Committee also noted that in most of the countries where standards of corporate governance are high, the stock exchanges have enforced some form of compliance through their listing agreements. 5.2 The Committee felt that some of the recommendations are absolutely essential for the framework of corporate governance and virtually form its core, while others could be considered as desirable. Besides, some of the recommendations may also need change of statute, such as the Companies Act, for their enforcement. In the case of others, enforcement would be possible by amending the Securities Contracts (Regulation) Rules, 1957 and by amending the listing agreement of the stock exchanges under the direction of SEBI. The latter, would be less time consuming and would ensure speedier implementation of corporate governance. The Committee therefore felt that the recommendations should be divided into mandatory and non- mandatory categories and those recommendations which are absolutely essential for corporate governance, can be defined with precision and which can be enforced through the amendment of the listing agreement could be classified as mandatory. Others, which are either desirable or which may require change of laws, may, for the time being, be classified as non-mandatory. Applicability 5.3 The Committee is of the opinion that the recommendations should be made applicable to the listed companies, their directors, management, employees and professionals associated with such companies, in accordance with the time table proposed in the schedule given later in this section. Compliance with the code should be both in letter and spirit and should always be in a manner that gives precedence to substance over form. The ultimate responsibility for putting the recommendations into practice lies directly with the board of directors and the management of the company. 5.4 The recommendations will apply to all the listed private and public sector companies, in accordance with the schedule of implementation. As for listed entities, which are not companies, but body corporates (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the recommendations will apply to the extent that they do not violate their respective statutes, and guidelines or directives issued by the relevant regulatory authorities. Schedule of implementation 5.5 The Committee recognises that compliance with the recommendations would involve restructuring the existing boards of companies. It also recognises that some companies, especially the smaller ones, may have difficulty in immediately complying with these conditions. 5.6 The Committee recommends that while the recommendations should be applicable to all the listed companies or entities, there is a need for phasing out the implementation as follows:
Board of Directors 6.1 The board of a company provides leadership and strategic guidance, objective judgement independent of management to the company and exercises control over the company, while remaining at all times accountable to the shareholders. The measure of the board is not simply whether it fulfils its legal requirements but more importantly, the board’s attitude and the manner it translates its awareness and understanding of its responsibilities. An effective corporate governance system is one, which allows the board to perform these dual functions efficiently. The board of directors of a company, thus directs and controls the management of a company and is accountable to the shareholders. 6.2 The board directs the company, by formulating and reviewing company’s policies, strategies, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestitures, change in financial control and compliance with applicable laws, taking into account the interests of stakeholders. It controls the company and its management by laying down the code of conduct, overseeing the process of disclosure and communications, ensuring that appropriate systems for financial control and reporting and monitoring risk are in place, evaluating the performance of management, chief executive, executive directors and providing checks and balances to reduce potential conflict between the specific interests of management and the wider interests of the company and shareholders including misuse of corporate assets and abuse in related party transactions. It is accountable to the shareholders for creating, protecting and enhancing wealth and resources for the company, and reporting to them on the performance in a timely and transparent manner. However, it is not involved in day-to-day management of the company, which is the responsibility of the management. Composition of the Board of Directors Independent directors and the definition of independence 6.6 The Blue Riband Committee of the USA and other Committee reports have laid considerable stress on the role of independent directors. The law however does not make any distinction between the different categories of directors and all directors are equally and collectively responsible in law for the board’s actions and decisions. The Committee is of the view that the non-executive directors, i.e. those who are independent and those who are not, help bring an independent judgement to bear on board’s deliberations especially on issues of strategy, performance, management of conflicts and standards of conduct. The Committee therefore lays emphasis on the calibre of the non-executive directors, especially of the independent directors. 6.7 Good corporate governance dictates that the board be comprised of individuals with certain personal characteristics and core competencies such as recognition of the importance of the board’s tasks, integrity, a sense of accountability, track record of achievements, and the ability to ask tough questions. Besides, having financial literacy, experience, leadership qualities and the ability to think strategically, the directors must show significant degree of commitment to the company and devote adequate time for meeting, preparation and attendance. The Committee is also of the view that it is important that adequate compensation package be given to the non-executive independent directors so that these positions become sufficiently financially attractive to attract talent and that the non executive directors are sufficiently compensated for undertaking this work. 6.8 Independence of the board is critical to ensuring that the board fulfils its oversight role objectively and holds the management accountable to the shareholders. The Committee has, therefore, suggested the above definition of independence, and the following structure and composition of the board and of the committees of the board. 6.9 The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. The number of independent directors (independence being as defined in the foregoing paragraph) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of board should comprise of independent directors and in case a company has an executive chairman, at least half of board should be independent. This is a mandatory recommendation. Nominee Directors 7.2 There are arguments both for and against the institution of nominee directors. Those who favour this practice argue that nominee directors are needed to protect the interest of the institutions who are custodians of public funds and who have high exposures in the projects of the companies both in the form of equity and loans. On the other hand those who oppose this practice, while conceding that financial institutions have played a significant role in the industrial development of the country as a sole purveyor of long term credit, argue that there is an inherent conflict when institutions through their nominees participate in board decisions and in their role as shareholders demand accountability from the board. They also argue that there is a further conflict because the institutions are often major players in the stock market in respect of the shares of the companies on which they have nominees. 7.3 The Committee recognises the merit in both points of view. Clearly when companies are well managed and performing well, the need for protection of institutional interest is much less than when companies are badly managed or under-performing. The Committee would therefore recommend that institutions should appoint nominees on the boards of companies only on a selective basis where such appointment is pursuant to a right under loan agreements or where such appointment is considered necessary to protect the interest of the institution. 7.4 The Committee also recommends that when a nominee of the institutions is appointed as a director of the company, he should have the same responsibility, be subject to the same discipline and be accountable to the shareholders in the same manner as any other director of the company. In particular, if he reports to any department of the institutions on the affairs of the company, the institution should ensure that there exist chinese walls between such department and other departments which may be dealing in the shares of the company in the stock market. Chairman of the Board 8.2 Given the importance of Chairman’s role, the Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively. This is a non-mandatory recommendation. Audit Committee 9.1 There are few words more reassuring to the investors and shareholders than accountability. A system of good corporate governance promotes relationships of accountability between the principal actors of sound financial reporting – the board, the management and the auditor. It holds the management accountable to the board and the board accountable to the shareholders. The audit committee’s role flows directly from the board’s oversight function. It acts as a catalyst for effective financial reporting. 9.2 The Committee is of the view that the need for having an audit committee grows from the recognition of the audit committee’s position in the larger mosaic of the governance process, as it relates to the oversight of financial reporting. 9.3 A proper and well functioning system exists therefore, when the three main groups responsible for financial reporting – the board, the internal auditor and the outside auditors – form the three-legged stool that supports responsible financial disclosure and active and participatory oversight. The audit committee has an important role to play in this process, since the audit committee is a sub-group of the full board and hence the monitor of the process. Certainly, it is not the role of the audit committee to prepare financial statements or engage in the myriad of decisions relating to the preparation of those statements. The committee’s job is clearly one of oversight and monitoring and in carrying out this job it relies on senior financial management and the outside auditors. However it is important to ensure that the boards function efficiently for if the boards are dysfunctional, the audit committees will do no better. The Committee believes that the progressive standards of governance applicable to the full board should also be applicable to the audit committee. 9.4 The Committee therefore recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency. This is a mandatory recommendation. 9.5 The following recommendations of the Committee, regarding the constitution, functions and procedures of audit committee would have to be viewed in the above context. But just as there is no "one size fits all" for the board when it comes to corporate governance, same is true for audit committees. The Committee can thus only lay down some broad parameters, within which each audit committee has to evolve its own guidelines. Composition 9.6 The composition of the audit committee is based on the fundamental premise of independence and expertise. The Committee therefore recommends that
Frequency of meetings and quorum 9.7 The Committee recommends that to begin with the audit committee should meet at least thrice a year. One meeting must be held before finalisation of annual accounts and one necessarily every six months. This is a mandatory recommendation This is a mandatory recommendation. Powers of the audit committee
Functions of the Audit Committee 9.10 As the audit committee acts as the bridge between the board, the statutory auditors and internal auditors, the Committee recommends that its role should include the following
Remuneration Committee of the Board 10.1 The Committee was of the view that a company must have a credible and transparent policy in determining and accounting for the remuneration of the directors. The policy should avoid potential conflicts of interest between the shareholders, the directors, and the management. The overriding principle in respect of directors’ remuneration is that of openness and shareholders are entitled to a full and clear statement of benefits available to the directors. 10.2 For this purpose the Committee recommends that the board 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 compensation payment. This is a non-mandatory recommendation. 10.3 The Committee however recognised that the remuneration package should be good enough to attract, retain and motivate the executive directors of the quality required, but not more than necessary for the purpose. The remuneration committee should be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders. Composition, Quorum etc. of the Remuneration Committee 10.4 The Committee recommends that to avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors should comprise of at least three directors, all of whom should be non-executive directors, the chairman of committee being an independent director. 10.5 The Committee deliberated on the quorum for the meeting and was of the view that remuneration is mostly fixed annually or after specified periods. It would not be necessary for the committee to meet very often. The Committee was of the view that it should not be difficult to arrange for a date to suit the convenience of all the members of the committee. The Committee therefore recommends that all the members of the remuneration committee should be present at the meeting. 10.6 The Committee also recommends that the Chairman of the remuneration committee should be present at the Annual General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries. All the above recommendations in paragraphs 10.4 to 10.6 are non-mandatory. 10.7 The Committee recommends that the board of directors should decide the remuneration of non-executive directors. This is a mandatory recommendation. Disclosures of Remuneration Package This is a mandatory recommendation. Board Procedures 11.1 The measure of the board is buttressed by the structures and procedures of the board. The various committees of the board recommended in this report would enable the board to have an appropriate structure to assist it in the discharge of its responsibilities. These need to be supplemented by certain basic procedural requirements in terms of frequency of meetings, the availability of timely information, sufficient period of notice for the board meeting as well as circulation of agenda items well in advance, and more importantly, the commitment of the members of the board. 11.2 The Committee therefore recommends that board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings. The minimum information as given in Annexure 2 should be available to the board. This is a mandatory recommendation. The Committee further recommends that to ensure that the members of the board give due importance and commitment to the meetings of the board and its committees, there should be a ceiling on the maximum number of committees across all companies in which a director could be a member or act as Chairman. The Committee recommends that a director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. This is a mandatory recommendation. Accounting Standards and Financial Reporting The companies should be required to give consolidated accounts in respect of all its subsidiaries in which they hold 51 % or more of the share capital. The Committee was informed that SEBI was already in dialogue with the Institute of Chartered Accountants of India to bring about the changes in the Accounting Standard on consolidated financial statements. The Institute of Chartered Accountants of India should be requested to issue the Accounting Standards for consolidation expeditiously. Equally in cases of companies with several businesses, it is important that financial reporting in respect of each product segment should be available to shareholders and the market to obtain a complete financial picture of the company. The Committee was informed that SEBI was already in dialogue with the Institute of Chartered Accountants of India to introduce the Accounting Standard on segment reporting. The Institute of Chartered Accountants of India has already issued an Exposure Draft on the subject and should be requested to finalise this at an early date. This again is an important disclosure. The Committee was informed that the Institute of Chartered Accountants of India had already issued an Exposure Draft on the subject. The Committee recommends that the Institute of Chartered Accountants of India should be requested to finalise this at the earliest. In the interim, the Committee recommends the disclosures set out in Clause 7 of Annexure-4 The treatment of deferred taxation and its appropriate disclosure has an important bearing on the true and fair view of the financial status of the company. The Committee recommends that the Institute of Chartered Accountants of India be requested to issue a standard on deferred tax liability at an early date. Management 13.3 The Committee believes that the management should carry out the following functions:
13.5 Good corporate governance casts an obligation on the management in respect of disclosures. The Committee therefore recommends that disclosures must be made by the management to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) This is a mandatory recommendation. Shareholders Responsibilities of shareholders 14.3 The effectiveness of the board is determined by the quality of the directors and the quality of the financial information is dependent to an extent on the efficiency with which the auditors carry on their duties. The shareholders must therefore show a greater degree of interest and involvement in the appointment of the directors and the auditors. Indeed, they should demand complete information about the directors before approving their directorship. 14.4 The Committee recommends that in case of the appointment of a new director or re-appointment of a director the shareholders must be provided with the following information:
Shareholders’ rights 14.6 The Committee therefore recommends that as shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes, they should not only be provided information as under the Companies Act, but also in respect of other decisions relating to material changes such as takeovers, sale of assets or divisions of the company and changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership. 14.7 The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on company’s web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. This is a mandatory recommendation. 14.8 The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each household of shareholders. This is a non-mandatory recommendation. 14.10 The annual general meetings of the company should not be deliberately held at venues or the timing should not be such which makes it difficult for most of the shareholders to attend. The company must also ensure that it is not inconvenient or expensive for shareholders to cast their vote. 14.11 Currently, although the formality of holding the general meeting is gone through, in actual practice only a small fraction of the shareholders of that company do or can really participate therein. This virtually makes the concept of corporate democracy illusory. It is imperative that this situation which has lasted too long needs an early correction. In this context, for shareholders who are unable to attend the meetings, there should be a requirement which will enable them to vote by postal ballot for key decisions. A detailed list of the matters which should require postal ballot is given in Annexure 3. This would require changes in the Companies Act. The Committee was informed that SEBI has already made recommendations in this regard to the Department of Company Affairs. 14.12 The Committee recommends that a board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. The Committee believes that the formation of such a committee will help focus the attention of the company on shareholders’ grievances and sensitise the management to redressal of their grievances. This is a mandatory recommendation This is a mandatory recommendation. Institutional shareholders 14.15 Given the weight of their votes, the institutional shareholders can effectively use their powers to influence the standards of corporate governance. Practices elsewhere in the world have indicated that institutional shareholders can sufficiently influence because of their collective stake, the policies of the company so as to ensure that the company they have invested in, complies with the corporate governance code in order to maximise shareholder value. What is important in the view of the Committee is that, the institutional shareholders put to good use their voting power 14.16 The Committee is of the view that the institutional shareholders
15.1 The Committee recommends that SEBI writes to the Central Government to amend the Securities Contracts (Regulation) Rules, 1957 for incorporating the mandatory provisions of this Report. 15.2 The Committee further recommends to SEBI, that as in other countries, the mandatory provisions of the recommendations may be implemented through the listing agreement of the stock exchanges. 15.3 The Committee recognises that the listing agreement is not a very powerful instrument and the penalties for violation are not sufficiently stringent to act as a deterrent. The Committee therefore recommends to SEBI, that the listing agreement of the stock exchanges be strengthened and the exchanges themselves be vested with more powers, so that they can ensure proper compliance of code of Corporate Governance. In this context the Committee further recommends that the Securities Contract (Regulation) Act, 1956 should be amended, so that in addition to the above, the concept of listing agreement be replaced by listing conditions. 15.4 The Committee recommends that the Securities Contracts (Regulation) Act, 1956 be amended to empower SEBI and stock exchanges to take deterrent and appropriate action in case of violation of the provisions of the listing agreement. These could include power of levying monetary penalty both on the company and the concerned officials of the company and filing of winding-up petition etc. 15.5 The Committee also recommends that SEBI write to the Department of Company Affairs for suitable amendments to the Companies Act in respect of the recommendations which fall within their jurisdiction. 15.6 The Committee recommends that there should be a separate section on Corporate Governance in the annual reports of companies, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory recommendation with reasons thereof and the extent to which the non-mandatory recommendations have been adopted should be specifically highlighted. This will enable the shareholders and the securities market to assess for themselves the standards of corporate governance followed by a company. A suggested list of items to be included in the compliance report is enclosed. in Annexure 4. This is a mandatory recommendation. 15.7 The Committee also recommends that the company should arrange to obtain a certificate from the auditors of the company regarding compliance of mandatory recommendations and annexe the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate should also be sent to the stock exchanges along with the annual returns filed by the company. This is a mandatory recommendation End Note Corporate governance extends beyond corporate law. Its fundamental objective is not mere fulfillment of the requirements of law but in ensuring commitment of the board in managing the company in a transparent manner for maximising long term shareholder value. The corporate governance has as many votaries as claimants. Among the latter, the Committee has primarily focussed its recommendations on investors and shareholders, as they are the prime constituencies of SEBI. Effectiveness of corporate governance system cannot merely be legislated by law neither can any system of corporate governance be static. As competition increases, technology pronounces the death of distance and speeds up communication, the environment in which firms operate in India also changes. In this dynamic environment the systems of corporate governance also need to evolve. The Committee believes that its recommendations will go a long way in raising the standards of corporate governance in Indian firms and make them attractive destinations for local and global capital. These recommendations will also form the base for further evolution of the structure of corporate governance in consonance with the rapidly changing economic and industrial environment of the country in the new millenium. Annexure 1 Names of the Members of the committee Shri Kumar Mangalam Birla, Chairman, Aditya Birla group Annexure 2
POST BALLOT SYSTEM Rationale Voting at the general meetings of companies is the most valuable and fundamental mechanism by which the shareholders accept or reject the proposals of the board of directors as regards the structure, the strategy, the ownership and the management of the corporation. Voting is the only mechanism available with the shareholders for exercising an external check on the board and the management. Under the present framework of the Companies Act, 1956, a company is required to obtain the approval of its shareholders for various important decisions such as increase in its authorised capital, shifting of registered office, change in the name, amalgamation and reconstitution, buy-back of shares, further issue of shares, etc. Since the shareholders of any large public listed company are scattered throughout the length and breadth of the country, they are unable to physically attend the general meetings of the company to exercise their right to vote on matters of vital importance. The system of voting by proxy has also not proved very effective. With a view to strengthening shareholder democracy, it is felt that all the shareholders of a company should be given the right to vote on certain critical matters through a postal ballot system, which has also been envisaged in the Companies Bill, 1997. Items requiring voting by postal ballot Some of the critical matters which should be decided by this system are –
Where a resolution is to be passed in relation to any of the aforesaid items through postal ballot,
Suggested List Of Items To Be Included In The Report On Corporate Governance In The Annual Report Of Companies 1. A brief statement on company’s philosophy on code of governance.
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