draft uk corp

8/8/2019 Draft UK Corp

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Draft

On

To understand how U.K corporate governance codes areculturally inadaptable in India and what issues can rise if this cultural misfit is ignored

Submitted to: Submitted by:Prof. Arun Dravayam Shashi Minchael

Navdeep KanwarSourabh KapoorPraveen SinghVikas ChahalPulkit ThakralRohit SrigyanUmesh Gupta

ASIA-PACIFIC INSTITUTE OF MANAGEMENT3, Institutional Area, Jasola, New Delhi 110025


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Objective:

To understand how U.K corporate governance codes are culturally inadaptable in Indiaand what issues can rise if this cultural misfit is ignored.

Sub-Objectives:

To understand the Cadbury and Green Committees Code in the UK and how theywere adapted by the Rahul Bajaj Committee of the CII, without serving any

purpose to Indian corporates.

To understand the changes made by the SEBI appointed Kumar Mangalam Birla

Committee to make the code more relevant to Indian context and the provisionsmade in the company law in the light of these recommendations.

. To understand the recommendations of the Government appointed Naresh

Chandra Committee that essentially adopted the governance practices in the USAand the provisions made in the company law in the light of theserecommendations.

To understand the recommendations made by the CII appointed Naresh ChandraCommittee to make a more comprehensive code and the incorporation of those

principles in the Companies Bill 2009


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First of all it aims to provide fair representation, full disclosure, a glimpse of transparency, accountability, responsibility, integrity, faith & justice.

Secondly we find that in todays competitive era where everything is materialistic,measured in monetary terms people tend to manipulate things as per their convenience for

serving their own ends, so is the law. Even though Corporate Governance has provided acode of conduct for effective governing of company, but people tend to search for loopholes & to face this situation investors awareness is extremely important. We tend to

present this topic before general public because we being the investor or might be thefuture investors spending our hard earned money should be aware of manipulations &along with it have the courage & awareness to protect ones right.So, it is rightly said, The best way to make your dreams come true is to wake up.

CORPORATE GOVERNANCE An Introduction

Global opinion is now converging very much in favour of ethics in all aspects of society- politics, administration, and judiciary, business as well as family & personal life. As thecorporate governance deals with this ethical aspect of corporate form of businessenterprise, so the issues involving corporate governance are taking high profile globally &have come to the force recently in India.

The concept of corporate governance stipulates parameters of accountability, control &reporting function of Board of Directors & encompasses the relationship among variousshareholders & other stakeholders.

Corporate governance is the term that is in use in abundance in corporate circles &seminar halls. As referred by corporate pundits it means the establishment of structuralframework or reforming the existing framework to ensure the governing of the companyto best serve the interest of all the stakeholders.

The Concept

As the name itself suggests, the term corporate governance is made of two words viz.Corporate & Governance . The concept of corporate governance is rounding aroundthese two words in their true sense. The word company in technical sense can be definedas a legal entity formed & registered under the Companies Act. In fact the Corporate/

Company is not merely a legal institution. It is rather a legal device for attainment of anysocial or economic end. It is therefore, a combined political, social, economic & legalinstitution. It is defined as an intricate, centralized, economic administrative structure run

by professional managers who hire capital from the investors. The expressiongovernance used to denote the mechanism employed to direct & control the affairs of anysystem, organization or institution.


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The concept of governance has assumed importance in the corporate entity of business, principally because in corporate entity, there is a divorce between capital& management .

Those who provide the funds & those who manage the fund in a corporate entity are notnecessarily the same people. The fund providers always want to be assured that the funds

provided by them are safe & growing & that they are capable of taking informeddecisions. This assurance is provided through the mechanism of corporate governanceembodied in functioning of corporate form of business enterprise. Thus, one can concludethat corporate governance referred to as system of regulating , controlling & directing the affairs of corporate form of business enterprise in such a way so as to best serve theinterest of all the stakeholders . Corporate governance is concerned with theestablishment of a system where by the directors are entrusted with responsibilities &duties in relation to the direction of corporate affairs. It is concerned with morals, ethics,values & parameters of conduct & behavior of the company & its management.

Definition

There is no universally agreed definition of corporate governance. Different people havedifferent definition of corporate governance. Some people think of it as a concept, whichaims to assure shareholder that their money is in safe hands. Other thinks of it in terms of contributions it makes to the efficiency & growth of business enterprise & countrieseconomy. All these views are valid. The concept of corporate governance has two hinges-

(1) Protection & enhancement of corporate wealth.(2) Complete transparency, integrity & accountability of the management, with anincreasingly greater focus on investor protection & public interest.

According to Cadbury Committee

Corporate governance is the system by which companies are directed & controlled. Boardof Directors is responsible for the governance of their companies. The shareholders role ingovernance is to appoint the directors & the auditors & to project on appropriategovernance structure is in place. The responsibility of Board include setting thecompanies strategic aims, providing the leadership to put them into effect, supervising themanagement of the business & reporting to the shareholders on their stewardship.

According to CII Code

Corporate governance deals with laws, procedures, practices & implicit rules thatdetermine companys ability to take managerial decisions vis--vis its elements

particularly its shareholders, creditors, state & employees. Corporate governance refers toan economic, legal & institutional environment that allows companies to diversify, grow,restructure & exit & do everything necessary to maximize long-term shareholders value.


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Genesis of Corporate Governance Code in India

While corporate governance is fairly recent issue, the concept itself is quite old. Themodern avatar of Corporate Governance concept started with the appointment of Cadbury Committee in the U.K. in 1992. The code was developed following thecollapse of some prominent companies. This committee recommended a code of best

practices based on principle of transparency, integrity & accountability. In U.S. also BlueRibbon Committee has been constituted to suggest the ways & means to improve theeffectiveness of Audit Committee.The discussion on Corporate Governance in India hasgained momentum during the later part of 90s in the light of the liberalisation &globalisation in the Indian market.

The Confederation of Indian Industries (CII) headed by Shri Rahul Bajaj prepared areport titled Desirable Corporate Governance A code. This is the first Indian paper of its kind on the subject of Corporate Governance. The code has recommendedtransparent corporate disclosure norms for all companies beyond a specified ceiling of the

paid up share capital. The code also recommended that the development of capital marketis dependent on good Corporate Governance, without which investors are not likely torepose confidence in companies. Companies following this code are more likely to attractinvestors. Many companies have voluntarily established high standards of CorporateGovernance results of which are self-evident. As the Corporate Governance isInternationally considered as a major instrument for investors protection, need was feltfor a comprehensive approach to accelerate the adoption of globally accepted practices of Corporate Governance.In the above-mentioned context, the SEBI setup a committee under the chairmanship of

Shri K. M. Birla on May 7, 1999. The report of the K.M. Birla committee was considered& adopted by the SEBI board in its meeting held on Jan 25, 2000. The major areas of

recommendations of KMB Committee are composition of board of directors, Constitution& functioning of Audit committee, remuneration of directors, disclosure requirements.

Birla Committee (SEBI) recommendations (2000)

1. At least 50% non-executive members.2. For a company with an executive Chairman, at least half of the board should be

independent directors, else at least one-third.3. Non-executive Chairman should have an office and be paid for job related

expenses.4. Maximum of 10 directorships and 5 chairmanships per person.

5. Audit Committee : A board must have a qualified and independent auditcommittee, of minimum 3 members, all non-executive, majority and chair independent with at least one having financial and accounting knowledge. Itschairman should attend AGM to answer shareholder queries. The committeeshould confer with key executives as necessary and the company secretary should

be he secretary of the committee. The committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six monthswith the quorum being the higher of two members or one-third of members with at


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least two independent directors. It should have access to information from anyemployee and can investigate any matter within its TOR, can seek outsidelegal/professional service as well as secure attendance of outside experts inmeetings. It should act as the bridge between the board, statutory auditors andinternal auditors with arranging powers and responsibilities.

6.Remuneration Committee : The remuneration committee should decideremuneration packages for executive directors. It should have at least 3 directors,all Nonexecutive and be chaired by an independent director.

7. The board should decide on the remuneration of non-executive directors and allremuneration information should be disclosed in annual report.

8. At least 4 board meetings a year with a maximum gap of 4 months between any 2meetings. Minimum information available to boards stipulated.

Narayana Murthy committee (SEBI) recommendations (2003)

1. Training of board members suggested.

2. There shall be no nominee directors. All directors to be elected by shareholders withsame responsibilities and accountabilities.

3. Non-executive director compensation to be fixed by board and ratified byshareholders and reported. Stock options should be vested at least a year after their retirement. Independent directors should be treated the same way as non-executivedirectors.

4. The board should be informed every quarter of business risk and risk managementstrategies.

5. Boards of subsidiaries should follow similar composition rules as that of parent andshould have at least one independent directors of the parent company .

6. The Board report of a parent company should have access to minutes of board

meeting in subsidiaries and should affirm reviewing its affairs.7. Performance evaluation of non-executive directors by all his fellow Board membersshould inform a re-appointment decision.

8. While independent and non-executive directors should enjoy some protection fromcivil and criminal litigation, they may be held responsible of the legal compliance inthe companys affairs.

9. Code of conduct for Board members and senior management and annual affirmationof compliance to it.


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Corporate Governance: Analysis of Clause 49 of ListingAgreement

I. Board of directors: -

The board of directors is accountable to the shareholders for creation & protection of shareholders value & responsible to them for adequate, timely & transparent reporting.Therefore, in order to discharge this function properly following provisions are inserted

by way of part 1 of Clause 49 of Listing Agreement.Board of Directors the company shall have an optimum combination of executive &non-executive directors with not less than 50% of Board of Directors comprising of non- executive directors.

KMB committee has observed that there is a practice in most of the Indian companies tofill their board with the representatives & relatives of promoters & there is a very little

scope for outside directors unless the promoters handpick them. The committee observedthat presently the boards in India comprise the following group of directors namely Promoter Directors Executive Directors Non-executive Directors Independent Directors among non-executive directorsThe term independent director has been specifically explained in Clause 49 as a director who does not have any pecuniary relationship with the company, its constituents & itssubsidiaries. As the non-executive directors, especially independent Directors have wider

perspective & independence to decision-making thus bring an independent judgment to bear on the boards deliberations. In order to ensure that board fulfills its oversight role

objective & holds the management accountable, the independence of Directors is a must.

The number of independent Directors would depend whether the chairman isexecutive or non-executive. In a case of non-executive chairman, at least one-third of board should comprise of independent Directors & in case of an executive chairman,at least half of the board should comprise of independent Directors.

II. Audit Committee:

One of the primary objectives of ushering of good Corporate Governance is ensuring proper accountability to the stakeholders & in present scenario to the shareholders &investors. The KMB committee has rightly observed that: A system of good CorporateGovernance promotes relationship of accountability between the principal actors of soundfinancial reporting- The board, the management & the Auditors. In order to properlyassess the board in discharge of its functions of accountability & transparency, the part-2of Clause 49 contains comprehensive provisions regarding constitution and compositionof Audit committee, frequency of its meetings & quorum, its powers & its role.


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A. Composition of Audit commttee

A qualified & independent committee shall be setup & that committee shall haveminimum three members, all being non-executive Directors, with majority of them beingindependent, & with al least one Director having financial and accounting knowledge.

The chairman of the committee shall be an independent Director. The chairman shall be present at AGM to answer shareholders queries. The Audit Committee should invite such of the executives, as it considers appropriate to

be present at the meetings of the committee, but on occasions it may also meet withoutthe presence of any executive of the company. The finance Director, head of internalAudit & when required, a representative of the external Auditor shall be present asinvitees for the meetings of audit committee.

B. Frequency of the meetings of the committee:

The Audit committee shall meet at least thrice a year. One meeting shall be held beforefinalization of accounts & one at every six months.

C. Powers of the Audit committee:

Clause 49 specifically vested this committee with the following specific powers: -

To investigate any activity within its terms of reference To seek information from any employee To obtain outside legal or other professional advice. To secure attendance of outsiders with the relevant expertise, if it considers

necessary.

D. Role of Audit committee: The Audit committees role is to act as catalyst for effective financial reporting. As thecommittee acts as a bridge between the board, the statutory auditors & internal auditors,the Audit committee has been charged with the responsibilities of monitoring the financialreporting & disclosure. Part-D of Part-II of Clause 49 specifically list out certain areas,where committee has to play its role.

Oversight of the companys financial reporting process & the disclosure of its

financial information to ensure that the financial statement is correct, sufficient &credible. Recommending the appointment & removal of external auditor, fixation of audit

fees & also approval for payment for any other services. Reviewing with the management the annual financial statements before

submission to the board, focusing primarily on-1. Any changes in accounting policies and practices.2. Significant adjustments arising out of audit.


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3. Compliance with accounting standards.4. Compliance with Stock Exchange & legal requirements concerning financial

statements.5. Reviewing the companies financial & risk management policy.

III. Remuneration of Directors: The Board of Directors shall decide the remuneration of the non-executive Director.

There shall be separate section on the Corporate Governance in the annual report whichcontain the following disclosures on the remuneration of the Directors:

All elements of remuneration package of all Directors ie. Salary, benefit, bonuses,stock options, pensions etc.

Details of fixed components & performance linked incentives. Service contract, notice period & severance fees. Stock options details if any.

IV. Board procedure:

The board meeting shall be held at least four times a year with maximum time gap of four months. Details of the minimum information to be placed before the Board of Directors:

Annual operating plans & budgets & any updates. Capital budgets & any updates.

Quarterly results for the company & operating divisions or business segments. Minutes of meetings of audit committee & other committees of the board. The details of joint ventures or collaboration agreement. Transactions involving substantial payments towards intangible assets.

A Director shall not be a member of more than 10 committees or act as a chairman of more than 5 committees across all the companies in which he is a Director. Every Director shall annually inform the company about the committee position heoccupies in other companies & notify changes as & when they take place.

V. Management:

The management is one of the important constituents of Corporate Governance. While theonus of laying down the policies is with the Board of Directors, the function of implementing the policies, managing day-to-day affairs of the company, ensuringcompliance with all regulations & laws, facilitating the working of the board & itscommittees & providing timely & accurate information rests with the management.


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Part V of Clause 49 prescribes that: -

As a part of Directors report a Management Discussion & Analysis Report should formthe part of annual report including the following matters viz.: -

Industry structure & developments Opportunities & threats Segment-wise or Product-wise performance Internal control system & their adequacy Disclosures relating to all material financial & commercial transactions, where

management has personal interest.

VI. Shareholders:

The shareholder is the most important constituent of Corporate Governance.It is the shareholders prerogative to appoint the directors & the auditors & therefore, it isexpected that the shareholders exercise all the care & efficiency in selecting the Directors& the auditors & take informed decisions. Further, they are the beneficiaries of all thedisclosures. Therefore, they should demand complete information from the board. Inorder to enable the shareholders to exercise this function, part VI of Clause 49 requires:

In case of appointment of a new director or re-appointment of a director the shareholdersmust be provided with the following information:

A brief resume of the director Nature of his expertise in specific functional areas. Names of companies in which the person also holds the directorship. Certain information like quarterly results, presentation made by companies to

analysts shall be put on companys web sites, or shall be sent to the stock exchanges on which the company is listed. Information to the stock exchangesshall be sent in such form so as to enable them to put it on their web site.

Company shall form Board Committee to be designated asShareholders/Investors Grievances Committee under the chairmanship of a non-executive Directors for grievance redressing of shareholders/investors like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividend etc.

VII. & VIII. Report on Corporate Governance & ComplianceCertificate:

To make the shareholders informed of the status of Corporate Governance practicesfollowed by the company it is necessary that a part of annual report contain a separatesection on Corporate Governance.


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Part VIII requires that:

Company shall obtain a certificate from the auditors regarding compliance of Clause 49.

The aforesaid certificate shall be annexed with the Directors report, which is sent

annually to all shareholders of the company. The same certificate should also be sent to the stock exchanges.


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Corporate Governance in UK

(Pulkit Thakral and Rohit Srigyan)

A detailed analysis of several UK corporate governance reports are given below-

CADBURY REPORT (1992) - The Cadbury Report, titled Financial Aspects of Corporate Governance is a report of a committee chaired by Adrian Cadbury that sets outrecommendations on the arrangement of company boards and accounting systems tomitigate corporate governance risks and failures. The report was published in 1992. Thereport's recommendations have been adopted in varying degree by the European Union ,the United States , the World Bank , and others.

Ethics and corporate governance: The issues raised by the Cadbury report

in the United Kingdom:In the late 1980s there was a series of sensational business scandals in the UnitedKingdom. The City of London responded by creating a special committee to examine thefinancial aspects of corporate governance. To reduce the power of executive directors inthe boardroom the committee recommended a greater role for non-executive directors,changes in board operations, and a more active role for auditors.

GREENBURY REPORT (1995) - The Greenbury Report released in 1995 was the product of a committee established by the United Kingdom Confederation of Business and Industry on corporate governance . It followed in the tradition of theCadbury Report and addressed a growing concern about the level of director

remuneration .

HAMPEL REPORT (1998) - The Hampel Report (Committee on CorporateGovernance) in 1998 was designed to be a revision of the corporate governancesystem in the UK. The remit of the committee was to review the Code laid down bythe Cadbury Report . It asked whether the code's original purpose was beingachieved. Hampel found that there was no need for a revolution in the UK corporategovernance system. The Report aimed to combine, harmonise and clarify theCadbury and Greenbury recommendations.

TURNBULL REPORT (1999) - The Turnbull Report - "Internal Control: Guidance for

Directors on the Combined Code" , published by the Internal Control Working Party of theInstitute of Chartered Accountants in England and Wales - sets out how directors of listedcompanies should comply with the UK's Combined Code requirements in respect of internal controls, including financial, operational, compliance and risk management.Organisations that wish to be good corporate citizens, whether publicly quoted, privatelyowned or in the public sector, look to the Combined Code - and therefore to the TurnbullReport - for guidance on how to do this.
http://en.wikipedia.org/wiki/Adrian_Cadburyhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Cadbury_Reporthttp://en.wikipedia.org/wiki/Director_remunerationhttp://en.wikipedia.org/wiki/Director_remunerationhttp://en.wikipedia.org/wiki/Cadbury_Reporthttp://www.icaew.co.uk/internalcontrolhttp://www.icaew.co.uk/internalcontrolhttp://en.wikipedia.org/wiki/Adrian_Cadburyhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Cadbury_Reporthttp://en.wikipedia.org/wiki/Director_remunerationhttp://en.wikipedia.org/wiki/Director_remunerationhttp://en.wikipedia.org/wiki/Cadbury_Reporthttp://www.icaew.co.uk/internalcontrolhttp://www.icaew.co.uk/internalcontrol


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THE HIGGS REVIEW (2003) - In April 2002 the Secretary of State, Patricia Hewitt,and the Chancellor, Gordon Brown, appointed Derek Higgs to lead a short independentreview of the role and effectiveness of non-executive directors and of the auditcommittee, aiming at improving and strengthening the existing Combined Code . Derek Higgs published his report 'Review of the Role and Effectiveness of Non-Executive

Directors' on 20th January 2003.

Higgs strongly backed the existing non-prescriptive approach to corporate governance:"comply or explain". Yet he advocated more provisions with more stringent criteria for the board composition and evaluation of independent directors.

SMITH REPORT (2003) - The Smith Report was a report on corporate governance submitted to the UK government in 2003. It was concerned with the independence of auditors in the wake of the collapse of Arthur Andersen and the Enron scandal inthe US in 2002. Its recommendations now form part of the Combined Code oncorporate governance, applicable through the Listing Rules for the Exchange. It was

substantially influenced by the views taken by the EU Commission. One important point was that an auditor himself should look at whether a company's corporategovernance structure provides safeguards to preserve his own independence.

New UK corporate governance code in force from 29 th June 2010

Annual Re-election

All directors of FTSE 350 companies should be elected annually: this decision reflects the preference of institutional shareholders and is seen as key to improving shareholdersengagement. While the majority of corporate responses argued for the existing three-year rotation, those companies who have already opted annual re-election of theentire board was reported as not having any change of voting patterns.

Diversity

To reduce the risk of group think, the code will contain a specific reference to diversityand, in particular gender diversity. Unlike some other jurisdictions there is no specificqouta requirement.

Board Reviews

Despite some opposition from listed companies, the Financial Reporting Council(FRC) is pressing ahead with the requirement for external evaluation at least every 3 years, but initially just for FTSE 350 companies. Limiting the requirement in this wayacknowledges some concerns about the current availability of sufficient high quality

board evaluation services. The FRC is confident that the market will in due courserespond, and will review the limitation accordingly.
http://en.wikipedia.org/wiki/Combined_Codehttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Enron_scandalhttp://en.wikipedia.org/wiki/Combined_Codehttp://en.wikipedia.org/w/index.php?title=Listing_Rules&action=edit&redlink=1http://en.wikipedia.org/wiki/Combined_Codehttp://en.wikipedia.org/wiki/Corporate_governancehttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Enron_scandalhttp://en.wikipedia.org/wiki/Combined_Codehttp://en.wikipedia.org/w/index.php?title=Listing_Rules&action=edit&redlink=1


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Risk

The absence of specific principle relating to risk management and control isacknowledged as a failure of previous versions of the code. This is now remediedwith a specific obligation(now more neutrally worded) on boards to identify and

monitor risk and is likely to lead to a significant increase in the formation of risk committees.

Role of Chairman

The new code has added additional responsibility to and emphasis on the role of Chairman: he is responsible for the leadership of the board and ensuring itseffectiveness; for achieving the requisite culture of constructive challenge by non-executives to the executives; and a particular responsibility for training,evaluationand board composition.

Time Commitment

Implicit in the new code is the recognition that the Chairman, the senior independentdirector(SID) and all other non-executive directors will be required to devote moretime to discharge of their responsibilities. Whether this should result in acorresponding increase in fees is not addressed in the code.

Reminder-no change to comply or explain requirements inannual report

The listing rules are unchanged, so a company with a premium listing of equityshares(including,for financial years beginning after 31 December 2009, thoseincorporated outside the UK) must include a statement in its annual report:

Of how it has applied the Codes main principles(enabling shareholders to evaluate howthe principles have been applied); and

As to whether or not it has compiled throughout the accounting period with all the Codesrelevant provisions and, if it has not compiled, identifying the relevant provisionsand the period of non-compliance and reasons for it.

A new section on comply or explain at the beginning of the code recognizes thatnon-compliance may be justified if good governance can be achieved in other ways. The company should clearly and carefully explain its reasons for noncompliance to shareholders and should aim to illustrate how its practices areconsistent with the principle to which the particular provision relates andcontributes to good governance. In the preface to the code, the FRC encourageschairmen to report personally in their annual statements how the principlesrelating to the role and effectiveness of the board have been applied.

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In relation to the new annual re-election requirements, the FRC points out thatcompanies are free to explain rather than comply if they believe that their existingarrangements ensure proper accountability and underpin board effectiveness, or that a transitional period is needed before they comply.

Key changes to main principlesThe FRC has changed the structure of the code to emphasise its underlying

principles. The main principles. The main principles are now listed separately atthe front of the code. A number of previous supporting principles have beenupgraded to main principles so that the company must report how they have beenapplied.

Leadership

The main principle that the board is collectively responsible for the success of thecompany has been expanded to emphasize that the success must be long-term.

A new main principle (upgraded from a supporting principle) emphasises the chairmansresponsibility for leading the board and ensuring its effectiveness in all aspects of itsrole.

A new main principle(upgraded from a supporting principle) says that non-executivedirectors(NEDs) should constructively challenge and help develop proposals onstrategy.

Board effectiveness

A new main principle requires the board and its committees to have the appropriate balance of skills, experience, independence and knowledge of the company to enablethem to discharge their respective duties and responsibilities effectively. A newsupporting principle re-enforces this requiring an appropriate combination of executive directors and NEDs(and in particular independent NEDs) such that noindividual or small group of individuals can dominate the boards decision-taking.

The code still provides that at least half the board, excluding the chairman, shouldcomprise NEDs determined by the board to be independent(except for companies

below the FTSE-350,which should have atleast two independent NEDs). Theindependent criteria are unchanged. The code provision setting out the nomination

committees responsibilities has been amended to reflect the new principle, socompanies may need to review the committees terms of refrence.

A new main principle(upgraded from a supporting principle) emphasises that all directorsshould be able to allocate sufficient time to the company to perform their responsibilities effectively. The FRC has not specified minimum time commitments.


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Risk

There is new main principle that the board is responsible for determining the nature andextent of the significant risks it is willing to take in achieving its strategic objectives.The FRC has indicated that any necessary further guidance on how to comply with

this new principle might be given in the Turnbull Guidance, which is ti be reviewedlater in 2010.The main principle that requires a sound system of internal control has been expanded to

cover risk management. The requirement for formal and transparent arrangements for considering how the board should apply the internal control principles also nowapplies to risk management.

UK COMBINED CODE ON CORPORATE GOVERNANCE

UK incorporated companies listed on the UK Stock Exchange are subject to theCombined Code on Corporate Governance. The most recent (2003) version of the Codecombines the Cadbury and Greenbury reports on corporate governance, the TurnbullReport on Internal Control (revised and republished as the Turnbull Guidance in 2005),the Smith Guidance on Audit Committees and elements of the Higgs Report. TheCombined Code is, in 2006, subject to a review.

The Financial Reporting Council (FRC) is the independent UK regulator and is alsoresponsible for the statutory oversight and regulation of auditors and of the professionalaccountancy and actuarial bodies. The UK Combined Code works on what is known as aComply or Explain basis; in other words, companies may choose not to comply withspecific provisions but, in that case, will have to provide a proper public explanation of their decision.

AIM Companies - Companies listed on AIM in the UK are not formally required tocomply with the Combined Code. Some choose to do so. The QCA (Quoted CompaniesAlliance) published, in July 2005, the Corporate Governance Guidelines for AIM companies, which are based on the Combined Code and are voluntary.

UK COMPANIES ACT 2004 - The UKs Companies (Audit, Investigations andCommunity Enterprise) Act of 2004 placed a statutory duty on officers and employees(including ex-employees) to provide auditors with information (other than legally

privileged information) and explanations in respect of any issue related to their audit of the companys accounts. The directors are required to make a statement that they havedisclosed (having taken appropriate steps to ascertain it) all relevant information to theauditors and making a false statement is a criminal offence.

The UKs Financial Reporting Review Panel (the FRRP), which was originally set up in1990 to look into instances of corporate accounting non-compliance with UK GAAP,gained new powers to require companies, directors and auditors to provide documents,
http://www.frc.org.uk/about/http://qcanet.co.uk/http://qcanet.co.uk/guidance_booklets.asphttp://qcanet.co.uk/guidance_booklets.asphttp://www.frc.org.uk/about/http://qcanet.co.uk/http://qcanet.co.uk/guidance_booklets.asphttp://qcanet.co.uk/guidance_booklets.asp


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information and explanations if there might be an accounts non-compliance with relevantreporting requirements. With the exception of small and medium enterprises, UK companies will be required to make detailed disclosure of non-audit services supplied bytheir auditors.

UK COMPANIES ACT 2006 - The Companies Act 2006, which received royal assent atthe end of 2006, is coming into law in stages and will be fully in effect by October 2008.This Act replaces virtually all the previous UK company legislation. The firstcommencement order contained requirements on disclosure of company information andmade provisions for the use of e-communications.


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Birla Committee (SEBI) recommendations (2000)

(Umesh Gupta and Sourabh Kapoor)

1. At least 50% non-executive members.2. For a company with an executive Chairman, at least half of the board should be

independent directors, else at least one-third.3. Non-executive Chairman should have an office and be paid for job related

expenses.4. Maximum of 10 directorships and 5 chairmanships per person.5. Audit Committee : A board must have a qualified and independent audit

committee, of minimum 3 members, all non-executive, majority and chair independent with at least one having financial and accounting knowledge. Itschairman should attend AGM to answer shareholder queries. The committeeshould confer with key executives as necessary and the company secretary should

be he secretary of the committee. The committee should meet at least thrice a year -- one before finalization of annual accounts and one necessarily every six monthswith the quorum being the higher of two members or one-third of members with atleast two independent directors. It should have access to information from anyemployee and can investigate any matter within its TOR, can seek outsidelegal/professional service as well as secure attendance of outside experts inmeetings. It should act as the bridge between the board, statutory auditors andinternal auditors with arranging powers and responsibilities.

6. Remuneration Committee : The remuneration committee should decideremuneration packages for executive directors. It should have at least 3 directors,all Nonexecutive and be chaired by an independent director.

7. The board should decide on the remuneration of non-executive directors and allremuneration information should be disclosed in annual report.

8. At least 4 board meetings a year with a maximum gap of 4 months between any 2meetings. Minimum information available to boards stipulated.


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IN LINE WITH INTERNATIONAL BESTPRACTICES, THE COMMITTEE RECOMMENDSAN ABBREVIATED LIST OF DISQUALIFICATIONS

FOR AUDITING ASSIGNMENTS, WHICHINCLUDES:

(Praveen Singh and Shashi Minchael)

Naresh Chandra committee recommendationsBoard of directorsRecommendation

There is no need to adopt the German system of two-tier boards to ensure desirablecorporate governance.

A single board, if it performs well, can maximise long term shareholder value just as wellas a two- or multi-tiered board. Equally, there is nothing to suggest that a two-tier board,

per se, is the panacea to all corporate problems

Recommendation

Any listed companies with a turnover of Rs.100 crores and above should have professionally competent, independent, non-executive directors, who should constitute

At least 30 percent of the board if the Chairman of the company is a non-executive director, or At least 50 percent of the board if the Chairman and Managing Director is thesame person.

Recommendation No single person should hold directorships in more than 10 listed companies.

Recommendation

For non-executive directors to play a material role in corporate decision making andmaximising long term shareholder value, they need to:

Become active participants in boards, not passive advisors; Have clearly defined responsibilities within the board such as the Audit Committee; and Know how to read a balance sheet, profit and loss account, cash flow statements andfinancial ratios and have some knowledge of various company laws. This, of course,


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excludes those who are invited to join boards as experts in other fields such as science andtechnology.

Desirable disclosure

Recommendation

Under Additional Shareholders Information, listed companies should give data on:

1. High and low monthly averages of share prices in a major Stock Exchange wherethe company is listed for the reporting year.

2. Greater detail on business segments up to 10% of turnover, giving share in salesrevenue, review of operations, analysis of markets and future prospects.

Recommendation

1. Consolidation of Group Accounts should be optional and subject to

The FIs allowing companies to leverage on the basis of the groups assets, and The Income Tax Department using the group concept in assessing corporate income tax.

Recommendation

Major Indian stock exchanges should gradually insist upon a compliance certificate,signed by the CEO and the CFO, which clearly states that:

The management is responsible for the preparation, integrity and fair presentation of thefinancial statements and other information in the Annual Report, and which also suggestthat the company will continue in business in the course of the following year.

The accounting policies and principles conform to standard practice, and where they donot, full disclosure has been made of any material departures.

The board has overseen the companys system of internal accounting and administrativecontrols systems either director or through its Audit Committee (for companies with aturnover of Rs.100 crores or paid-up capital of Rs.20 crores)Capital market issue.

Recommendation

Government must allow far greater funding to the corporate sector against the security of shares and other paper.

Creditors right


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Recommendation

It would be desirable for FIs as pure creditors to rewrite their covenants to eliminatehaving nominee directors except:

a) In the event of serious and systematic debt default; b) In case of the debtor company not providing six-monthly or quarterly operational datato the concerned FI(s).

Recommendation

Companies that default on fixed deposits should not be permitted to

Accept further deposits and make inter-corporate loans or investments until the defaultis made good; Declare dividends until the default is made good.

Highlights of the Bill

The Bill shifts the onus of regulation and oversight over management away from thegovernment and towards shareholders. It provides for stricter standards of approval byshareholders over some types of management decisions.

The Bill allows for certain types of companies to be subject to a less stringent regulatoryframework.

It seeks to strengthen corporate governance by including new provisions related toindependent directors and auditors.

It gives greater powers to creditors to supervise a rescue plan and restrict the powers of management in the rehabilitation of a sick company.

The Bill establishes a National Company Law Tribunal to administer provisions withrespect to company law. It increases penalties and provides for special courts to tryoffences under the Act.

Shareholders and creditors can file class action suits against the company for breaching provisions of any Act.

Key Issues and Analysis


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The composition and powers of the National Company Law Tribunal are similar tothose introduced by a 2002 amendment to the Companies Act. The constitutional validityof that amendment is being examined by the Supreme Court.

The Bill permits certain financial relationships between independent directors and thecompany, which can lead to conflicts of interest.

Some provisions in the Bill, such as those covering independent directors and thedelisting of companies, conflict with provisions under the SEBI Act and its regulations.

The Bill provides for a number of issues currently specified in the Act, to be specified by the government in the rules. The government has not issued draft rules to the Bill sothe impact of any possible change cannot be estimated.

Fines have been increased and the range of offences which are punishable byimprisonment has been widened. The Bill does not require proof of intent to commit anoffence as a condition for criminal prosecution. This differs from the recommendation of the Irani Committee.

Corporate Governance

Independent DirectorsThe Bill requires public listed companies above a prescribed size to reserve a third of allseats on the board for independent directors. It requires that independent directors (or their relatives) not do business with the company which amounts to more than 10% of the

turnover of the company in the past two years. Permitting financial transactions with thecompany up to this point creates a potential conflict of interest. The listing agreementunder the SEBI Act prohibits independent directors from a material financial relationshipwith company but does not define the term material.Unlike the 1956 Act, the Bill limits the number of directors on the board of a company totwelve, excluding the nominees of lending institutions. Specifying a cap goes against thestated objective to provide a framework for responsible self-regulation by allowingdecisions to be left to shareholders.Related Party TransactionsThe 1956 Act restricts transactions between a company and its directors, and certain other entities, on the grounds of possible conflict of interest. Government approval is required

in most cases. The Bill restricts such transactions only for public companies but broadensthe definition of a related party to include managers of the company. The approval of shareholders, rather than the government is now required (see Table 2).

draft uk corp

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