CORPORATE GOVERNANCE PRACTICES IN INDIA

MRS SAVITA MAHENDRU

ASSISTANT PROFESSOR IN COMMERCE

HANS RAJ MAHILA MAHA VIDYALAYA JALANDHAR

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CORPORATE GOVERNANCE

• INTRODUCTION-Corporate governance is concerned with set of principles, ethics, values, morals, rules regulations, & procedures etc. Corporate governance establishes a system whereby directors are entrusted with duties and responsibilities in relation to the direction of the company’s affairs.
• The term “governance” means control i.e. controlling a company, an organization etc or a company & corporate governance is governing or controlling the corporate bodies i.e. ethics, values, principles, morals. For corporate governance to be good the manager needs to meet its responsibilities towards its owners (shareholders), creditors, employees, customers, government and the society at large. Corporate governance helps in establishing a system where a director is showered with duties and responsibilities of the affairs of the company.

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CONT.

• For effective corporate governance, its policies need to be such that the directors of the company should not abuse their power and instead should understand their duties and responsibilities towards the company and should act in the best interests of the company in the broadest sense.
• The concept of ‘corporate governance’ is not an end; it’s just a beginning towards growth of company for long term prosperity.

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EMERGENCE OF CORPORATE � GOVERNANCE IN INDIA

Corporate governance concept emerged in India after the second half of 1996 due to economic liberalization and deregulation of industry and business. With the changing times, there was also need for greater accountability of companies to their shareholders and customers. The report of Cadbury Committee on the financial aspects of corporate Governance in the U.K. has given rise to the debate of Corporate Governance in India.

Need for corporate governance arises due to separation of management from the ownership. For a firm success, it needs to concentrate on both economical and social aspect. It needs to be fair with producers, shareholders, customers etc. It has various responsibilities towards employees, customers, communities and at last towards governance and it needs to serve its responsibilities at the best at all aspects.

MEANING OF CORPORATE � GOVERNANCE

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders.��

DEFINITION OF CORPORATE � GOVERNANCE

Cadbury Committee[1] ( U.K.), 1992 has defined corporate governance as such : “Corporate governance is the system by which companies are directed and controlled. It encompasses the entire mechanics of the functioning of a company and  attempts  to  put  in  place  a  system  of  checks  and  balances between the shareholders, directors, employees, auditor and the management.”

“ Father of Corporate Governance- Bob Tricker”

CORPORATE GOVERNANCE COMMITTEES IN INDIA AND THEIR RECOMENDATIONS

� CORPORATE GOVERNANCE � COMMITTEES IN INDIA�

With the formation of corporate form of organizations, the frame work of corporate governance got wide recognition and quite peculiarly it was prevalent in various manifestations throughout the world. The theme of Corporate Governance has got recognition due to the constitution and formation of various committees and formulation of various laws throughout the world.

With respect to India, after the economic initiatives in 1991, the Govt. of India thought it fit to respond to the developments taking placing the world over and accordingly the initiatives recommended by Cadbury Committee Report got prominence. In order to give due prominence Confederation of Indian Industry (CII), the Associated Chambers of Commerce and Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted committees to recommend initiatives in Corporate Governance.

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CONT.

• The report of various committees helped a lot to streamline the corporate throughout the world. Some of the Committees with its formation is given under the following table-

S.NO COMMITTEE COUNTRY DATE OF SUBMISSION

1 Cadbury England 1992

2 King committee South of africa 1994 & 2002

3 CII India 1996

4 Hampel England 1998

5 Kumar manglam India 2000

birla

6 Naresh chandra India 2002

7 N. R. Narayana India 2003

Murthy

CONT.

However with respect to India, the recommendations of Naresh Chandra Committee, Dr. J. J. Irani Committee constituted by Ministry of Corporate Affairs, the Kumar Mangalam Birla Committee and N. R. Narayana Murthy Committee constituted by SEBI are more prominent. Apart from these committees, there are OECD( Org. for economic and development) principles and reviews by various other corporate bodies like FICCI(federation of Indian chambers of commerce and industry) ,KPMG, ICSI(Institute of company secretaries of India) etc. on the corporate governance practices in India.

Some of the recommendations of these committees are as follows:

1.National Task Force � Chaired by Rahul Bajaj

• In 1996, CII(Confederation on Indian Industry) took a special initiative on Corporate Governance – the first institutional initiative in Indian industry.
• The objective was to develop and promote a code for Corporate Governance to be adopted and followed by Indian companies, be those in the Private Sector, or the Public Sector, Banks or Financial Institutions, all of which are corporate entities.
• This initiative by CII flowed from public concerns regarding the protection of investor interest, especially the small investor, the promotion of transparency within business and industry; the need to move towards international standards in terms of disclosure of information by the corporate sector and, through all of this, to develop a high level of public confidence in business and industry.

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� Desirable Code Of Corporate � Governance�

• No need for German style two-tiered board.
• In case of listed company with turnover exceeding Rs.100 crores, independent directors should consist of: - (a). 30% if Chairman is non-executive director (b).50% if Chairman & MD is the same person.
• No single person should hold directorships in more than 10 listed companies.
• Non-executive directors should be competent and active.
• Commission not exceeding 1% (3%) of net profits for a company with (out) a MD.
• Attendance record of directors should be made explicit at the time of reappointment; less than 50% no re-appointment.
• Key information that must be reported to and placed before the board.
• Listed companies with turnover over Rs.100 crores or paid-up capital of Rs.20 crores should have an audit committee.
• Credit Rating.

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2. Kumar Mangalam Birla � Committee Report (2000)

• In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate governance. The report submitted by the committee 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.

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• The primary objective of the committee was to view corporate governance from the perspective of the investors and shareholders and to prepare a ‘Code' to suit the Indian corporate environment.

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CONT.

• The committee divided the recommendations into two categories-

A. Mandatory Recommendations

Applies To Listed Companies With Paid Up Capital Of Rs.3 Crore And Above.

Composition Of Board Of Directors – Optimum Combination Of

executive and non-executive director.

Audit Committee – With 3 Independent Directors With One Having Financial And Accounting Knowledge.

Remuneration Committee.

Management Discussion And Analysis Report Covering Industry Structure, Opportunities, Threats, Risks, Outlook, Internal Control System.

Information Sharing With Shareholders.

Board Procedures – At least 4 Meetings of the Board in a Year with Maximum Gap of 4 Months between 2 Meetings.

CONT.

B. Non-Mandatory recommendations

Role of chairman

Remuneration Committee Of Board.

Corporate restructuring.

Further Issue Of Capital.

Venturing into new business.

Sale Of Whole Or Substantial Part Of The Undertaking.

Shareholders' Right For Receiving Half Yearly Financial Performance Postal Ballot Covering Critical Matters Like Alteration In Memorandum.

3. Naresh chandra committee report on corporate audit and � governance (2002)

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The Ministry of Corporate Affairs had appointed a high level committee in August 2002 to examine various corporate governance issues. The committee had been entrusted to analyze and recommend changes, if necessary, in diverse areas such as:

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• The procedure for appointment of auditors and determination of audit fees;
• Restrictions, if necessary, on non-audit fees.
• Independence of auditing functions.
• Measures required to ensure that the management and companies actually present 'true and fair' statement of the financial affairs of companies.
• The need to consider measures such as certification of accounts and financial statements by the management and directors.

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CONT.

• The committee’s recommendations relate to-

Disqualifications for audit assignments.

List of prohibited non – audit services.

Auditor's disclosure of contingent liabilities.

Management's certification in the event of auditor's replacement.

Auditor's annual certification of independence.

Appointment of auditors.

Defining an independent director.

Percentage of independent directors.

Minimum board size of listed companies

Disclosure on duration of board meetings/committee meetings

Additional disclosure to directors

Independent directors on Audit Committees of listed companies;

Remuneration of non-executive directors

Corporate Serious Fraud Office

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4. N. R. Narayana Murthy � Committee Report (2003)

• With the belief that the efforts to improve corporate governance standards in India must continue because these standards themselves were evolving in keeping with the market dynamics, the Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate Governance in 2002 , in order to evaluate the adequacy of existing corporate governance practices and further improve these practices. It was set up to review Clause 49, and suggest measures to improve corporate governance standards.

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The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The Committee comprised members from various walks of public and professional life. This included captains of industry, academicians, public accountants and people from financial press and industry forums.

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CONT.

The issues discussed by the committee primarily related to audit committees, audit reports:

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• independent directors
• related parties
• risk management
• directorships and director compensation
• codes of conduct and financial disclosures.

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• The committee's recommendations in the final report were selected based on parameters including their relative importance, fairness, accountability and transparency, ease of implementation, verifiability and enforceability

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CONT.

• Mandatory Recommendations-

Strengthening the responsibilities of audit committees.

Improving the quality of financial disclosures, including those related to related party transactions and proceeds from initial public offerings.

Requiring corporate executive boards to assess and

disclose business risks in the annual reports of companies.

Introducing responsibilities on boards to adopt formal codes of conduct; the position of nominee directors.

Stock holder approval and improved disclosures relating to compensation paid to non-executive directors.

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CONT.

• Non-Mandatory recommendations-

Moving to a regime where corporate financial statements are not qualified.

Instituting a system of training of board members.

Evaluation of performance of board members.

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5. Naresh Chandra Committee � Report (2009)

• The Naresh Chandra committee was appointed in August 2002 by the Department of Company Affairs (DCA) under the Ministry of Finance and Company Affairs to examine various corporate governance issues.

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• The Committee submitted its report in December 2002.

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• It made recommendations in two key aspects of corporate governance: financial and non-financial disclosures: and independent auditing and board oversight of management.

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• The salient recommendations are as follows:
• Creation of a new post of Intelligence Advisor to assist the NSA and the National Intelligence Board on matters relating to coordination in the functioning of intelligence committee.

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CONT.

• Amendment to Prevention of Corruption Act to reassure honest officers, who take important decisions about defense equipment acquisition, so that they are not harassed for errors of judgment or decision taken in good faith.

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• A permanent Chairman of the Chiefs of Staff Committee .

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• Expediting the creation of new instruments for counter-terrorism, such as the National Intelligence Grid and National Counter Terrorism Centre.

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• Deputation of officers from services up to director's level in Ministry of Defense.

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• Measures to augment the flow of foreign language experts into the intelligence and security agencies, which face a severe shortage of trained linguists.

PRESENT SCENARIO-COMPANIES � ACT,2013

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• CA,2013 introduces significant changes to the composition of the boards of directors.
• CA,2013 for the first time codifies the duties of directors.
• SEBI amends the Listing Agreement (with prospective effect from October 01, 2014) to align it with CA,2013.
• The Government of India has recently notified Companies Act,2013 ("CA 2013"), which replaces the erstwhile Companies Act, 1956 (“CA 1956").

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KEY CHANGES INTRODUCED BY � COMPANIES ACT,2013

• . BOARD COMPOSITION
• CA 2013 has introduced significant changes in the composition of the board of directors of a company. The key changes introduced are set out below:
• NUMBER OF DIRECTORS: The following key changes have been introduced regarding composition of the board:
• A one person company shall have a minimum of 1 (one) director;
• CA 1956 permitted a company to determine the maximum number of directors on its board by way of its articles of association. CA 2013, however, specifically provides that a company may have a maximum of 15 (fifteen) directors.
• CA 1956 required public companies to obtain Central Government's approval for increasing the number of its directors above the limit prescribed in its articles or if such increase would lead to the total number of directors on the board exceeding 12 (twelve) directors. CA 2013 however, permits every company to appoint directors above the prescribed limit of 15 (fifteen) by authorizing such increase through a special resolution

CONT.

Key takeaway: Allowing companies to increase the maximum number of directors on their boards by way of a special resolution would ensure greater flexibility to companies.

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CA 2013 requires companies to have the following classes of directors:

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CONT.

• RESIDENT DIRECTOR:

CA 2013 introduces the requirement of appointing a resident director, i.e., a person who has stayed in India for a total period of not less than 182 (one hundred and eighty two) days in the previous calendar year.

• Key Takeaway : The requirement to have a resident director on the board of companies has been viewed as a move to ensure that boards of Indian companies do not comprise entirely of non-resident directors. This provision has caused significant difficulties to companies, since it has been brought into force with immediate effect, requiring companies to restructure their boards immediately to ensure compliance with CA 2013.
• INDEPENDENT DIRECTOR:

CA 1956 did not require companies to appoint an independent director on its board. Provisions related to independent directors were set out in Clause 49 of the Listing Agreement ("Listing Agreement").

CONT.

• INDEPENDENT DIRECTOR:

CA 1956 did not require companies to appoint an independent director on its board. Provisions related to independent directors were set out in Clause 49 of the Listing Agreement ("Listing Agreement").

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Number of independent directors: As per the Listing Agreement, only listed companies were required to appoint independent directors. The number of independent directors on the board of a listed company was required to be equal to :

1. one third of the board, where the chairman of the board is a non-executive director; or
1. (ii) one half of the board, where the chairman is an executive director.

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CONT.

• However, under CA 2013, the following companies are required to appoint independent directors:
1. Public listed company: At least one third of the board to be comprised of independent directors; and
2. Certain specified companies that meet the criteria listed below are required to have at least 2 (two) independent directors:
• Public companies which have paid up share capital of INR 100,000,000 (Rupees one hundred million only);
• Public companies which have a turnover of 1,000,000,000 (Rupees one billion only); and
• Public companies which have, in the aggregate, outstanding loans, debentures and deposits exceeding INR 500,000,000 (Rupees five hundred million only)

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CONT.

A Qualification criteria:

• CA 2013 prescribes detailed qualifications for the appointment of an independent director on the board of a company. Some important qualifications include:
• he / she should be a person of integrity, relevant expertise and experience;
• he / she is not or was not a promoter of, or related to the promoter or director of the company or its holding, subsidiary or associate company;
• he / she has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors during the 2 (two) immediately preceding financial years or during the current financial year

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CONT.

B Duties of Independent directors: 

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• Neither the Listing Agreement nor the CA 1956 prescribed the scope of duties of independent directors. CA 2013 includes a guide to professional conduct for independent directors, which crystallizes the role of independent directors by prescribing facilitative roles, such as offering independent judgment on issues of strategy, performance and key appointments, and taking an objective view on performance evaluation of the board. Independent directors are additionally required to satisfy themselves on the integrity of financial information, to balance the conflicting interests of all stakeholders and, in particular, to protect the rights of the minority shareholders. The SEBI Circular however, states that the board is required to lay down a code of conduct which would incorporate the duties of independent directors as set out in CA 2013.

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CONT.

C Liability of Independent Directors:

• �Under CA 1956, independent directors were not considered to be "officers in default" and consequently were not liable for the actions of the board. CA 2013 however, provides that the liability of independent directors would be limited to acts of omission or commission by a company which occurred with their knowledge, attributable through board processes, and with their consent and connivance or where they acted diligently.

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D Position of Nominee Directors

• While the Listing Agreement stated that the nominee directors appointed by an institution that has invested in or lent to the company are deemed to be independent directors, CA 2013 states that a nominee director cannot be an independent director.
• CA 2013 defines nominee director as a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by the Government or any other person to represent its interests.

CONT.

2. COMMITTEES OF THE BOARD

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CA 2013 envisages 4 (four) types of committees to be constituted by the board:

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• III. BOARD MEETINGS AND PROCESSES
• The key changes introduced by CA 2013 with respect to board meetings and processes are as under:
• First board meeting of a company to be held within 30 (thirty) days of incorporation;
• Notice of minimum 7 (seven) days must be given for each board meeting. Notice for board meetings may be given by electronic means. However, board meetings may be called at shorter notice to transact "urgent business" provided such meetings are either attended by at least 1 (one) independent director or decisions taken at such meetings on subsequent circulation are ratified by at least 1 (one) independent director.

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RELIANCE INDUSTRIES- CORPORATE GOVERNANCE REPORT

BEST CORPORATE GOVERNANCE PRACTICES

RIL maintains the highest standards of Corporate Governance. It is the Company’s constant endeavour to adopt the best Corporate Governance practices keeping in view the international codes of Corporate Governance and practices of well-known global companies. Some of the best implemented global governance norms include the following:

• The Company has a designated Lead Independent Director with a defined role.
• All securities related filings with Stock Exchanges are reviewed every quarter by the Stakeholders’ Relationship Committee.
• The Company has independent Board Committees for matters related to Corporate Governance and stakeholders’ interface and nomination of Board members.
• The Company’s internal audit is also conducted by independent auditors.

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CONCLUSION

Corporate governance is essentially a soft issue, whose essence cannot be captured by quantitative and structural factors alone, one of the challenges making corporate governance norms mandatory is the need to differentiate between form and content.

For instance how do we determine whether companies actually internalize the desired corporate governance norms or whether they look at corporate governance as a check-the-box exercise to be observed more in letter than in spirit.

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Currently, corporate governance in India is at crossroads; while corporate governance codes have been drafted with a deep understanding of the governance around the world, there is still a need to develop more appropriate solutions that would address India-specific challenges more efficiently.