indian committees

8/14/2019 Indian Committees

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Indian Committees andIndian Committees and

GuidelinesGuidelines


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Deficiencies of Companies ActDeficiencies of Companies Act

The Companies Act, 1956 came intoThe Companies Act, 1956 came intoexistence in an environment of Licenseexistence in an environment of License

and Permit Rajs. Over two dozenand Permit Rajs. Over two dozen

amendments to the Act have not beenamendments to the Act have not been

found adequate to tackle the present-dayfound adequate to tackle the present-daycorporate frauds; their enforcement havecorporate frauds; their enforcement have

remained weak and inefficient. Some ofremained weak and inefficient. Some of

the deficiencies could be noted as:the deficiencies could be noted as:

1.1. Non-executive directors have very littleNon-executive directors have very littleformal roles to playformal roles to play

2.2. Non-executive directors are ornamentalNon-executive directors are ornamental

positions they could be on the boards ofpositions they could be on the boards of

20 companies20 companies


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3.3. In regard to financial reporting theIn regard to financial reporting theact contains only provisions thatact contains only provisions thatare rule-based and ritualistic butare rule-based and ritualistic butnot driving transparencynot driving transparency

4. No formal qualifications for a4. No formal qualifications for adirector of the companydirector of the company

5. Though auditors are supposedly5. Though auditors are supposedlyappointed by the shareholders, theappointed by the shareholders, thelatter have very little interactionlatter have very little interactionwith the former malpractices arewith the former malpractices arethe result of collusion with auditorsthe result of collusion with auditorsand managementand management


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Working Group on theWorking Group on the

Companies Act, 1996Companies Act, 1996

The government set up a working groupThe government set up a working groupin August, 1996 to rewrite the Companiesin August, 1996 to rewrite the Companies

Act. Several recommendations wereAct. Several recommendations were

made by the working group.made by the working group.

With regard to financial disclosures,With regard to financial disclosures,following recommendations were made:following recommendations were made:

1.1. Apart from disclosing directors income inApart from disclosing directors income in

the P & L A/c, a tabular form that givesthe P & L A/c, a tabular form that gives

out details of the remuneration andout details of the remuneration andcommission should be appendedcommission should be appended

2.2. Costs incurred in availing services of aCosts incurred in availing services of a

group resource company must begroup resource company must be

separately disclosedseparately disclosed


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3. Directors report should contain3. Directors report should containinformation on its divisions such as theirinformation on its divisions such as theirshare in total turnover, review ofshare in total turnover, review ofoperations during the year, marketoperations during the year, marketconditions, future prospectsconditions, future prospects

4. Making separate disclosures about the4. Making separate disclosures about theend-use-of such funds generated fromend-use-of such funds generated frompublic through shares, debentures, orpublic through shares, debentures, orother securities- how much were utilizedother securities- how much were utilized

in the financial year ended and where arein the financial year ended and where arethe residual fundsthe residual funds

5. Any inappropriate treatment of an item in5. Any inappropriate treatment of an item inthe balance sheet or P & L A/c should bethe balance sheet or P & L A/c should bedealt with in the Directors reportdealt with in the Directors report


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In regard to non-financial disclosures,In regard to non-financial disclosures,following recommendations were made:following recommendations were made:

1.1. Comprehensive information on the relativesComprehensive information on the relativesof directors either as employees or boardof directors either as employees or boardmembersmembers

2.2. Maintain a register disclosing directorsMaintain a register disclosing directorsinterests in any contract or arrangement ofinterests in any contract or arrangement ofthe company- shareholders should bethe company- shareholders should beinformed about this in the AGM noticeinformed about this in the AGM notice

3.3. Existence of directors shareholding registerExistence of directors shareholding registerto be mentioned in the AGM noticeto be mentioned in the AGM notice

4.4. Details of loans availed by full-time directorsDetails of loans availed by full-time directorsand limited for only housing, medicaland limited for only housing, medicalassistance, and education of family membersassistance, and education of family members


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The CII InitiativeThe CII Initiative

A national task forceA national task forceheaded by past president of CII,headed by past president of CII,

Rahul Bajaj as chairmanRahul Bajaj as chairman

presented its draft guidelinespresented its draft guidelinesand the Code of Corporateand the Code of Corporate

Governance in April 1997 whichGovernance in April 1997 which

CII adopted after they wereCII adopted after they weredebated at workshops anddebated at workshops and

seminars. CII recommendationsseminars. CII recommendations

contained:contained:


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1.1. The board should meet at least 6 times in an yearThe board should meet at least 6 times in an year2.2. Companies with turnovers over Rs. 100 croresCompanies with turnovers over Rs. 100 crores

and above should have professionally competentand above should have professionally competentindependent non-executive directors who couldindependent non-executive directors who could30% of the board if the chairman is non-30% of the board if the chairman is non-executive and 50% if the chairman and MD isexecutive and 50% if the chairman and MD is

same personsame person3.3. A person should not be directors in more than 10A person should not be directors in more than 10

listed companieslisted companies

4.4. Non-executive directors should be activeNon-executive directors should be activeparticipants in the boards and not just passiveparticipants in the boards and not just passivespectators should have clearly defined rolesspectators should have clearly defined roles

such as member of audit committee shouldsuch as member of audit committee shouldknow how to read balance sheets, etcknow how to read balance sheets, etc

5.5. Non-executive directors to be offered commissionNon-executive directors to be offered commissionbased on current profits (apart from sitting fees)based on current profits (apart from sitting fees)to secure their better inputsto secure their better inputs


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6. While re-appointing directors attendance records of6. While re-appointing directors attendance records ofthe directors should be given. Directors with lessthe directors should be given. Directors with lessthan 50% attendance shall not be re-appointed.than 50% attendance shall not be re-appointed.

7. Key information to be placed before the boards:7. Key information to be placed before the boards: Annual operating plans & budgets for capital,Annual operating plans & budgets for capital,

manpower, and overheadsmanpower, and overheads

Internal audit reports including cases of thefts andInternal audit reports including cases of thefts anddishonestydishonesty Serious accidents/occurrences, effluent & pollutionSerious accidents/occurrences, effluent & pollution

problemsproblems Defaults in payments of interest/principal on anyDefaults in payments of interest/principal on any

public deposits/secured creditors/financialpublic deposits/secured creditors/financial

institutionsinstitutions Defaults of non-payments in lieu of principal on anyDefaults of non-payments in lieu of principal on any

company or materially substantial non-paymentscompany or materially substantial non-paymentsfor goods sold by the companyfor goods sold by the company


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Details of joint venture/ collaborationDetails of joint venture/ collaborationagreementsagreements

Transactions that involve payments towardTransactions that involve payments towardgoodwill, brand equity, and intellectualgoodwill, brand equity, and intellectual

propertyproperty

Recruitment and remuneration of seniorRecruitment and remuneration of seniorofficers just below the board including theofficers just below the board including theappointment or removal of CFO and CSappointment or removal of CFO and CS

Labor problems and proposed solutionsLabor problems and proposed solutions Returns on foreign exchange exposure andReturns on foreign exchange exposure and

risks of adverse exchange rate movementrisks of adverse exchange rate movement


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Major Indian Stock Exchanges shouldMajor Indian Stock Exchanges shouldinsist upon a compliance certificateinsist upon a compliance certificatesigned by CEO and the CFO stating:signed by CEO and the CFO stating:

1.1. The company will continue to be inThe company will continue to be in

business in the following yearbusiness in the following year

2.2. The accounting standards and principlesThe accounting standards and principlesconform to the standard practiceconform to the standard practice

3.3. The management was responsible forThe management was responsible forpreparation, integrity, and fairpreparation, integrity, and fair

presentations of the financial statementspresentations of the financial statements4.4. The board has overseen the internalThe board has overseen the internal

accounting and administrative controlsaccounting and administrative controlsdirectly or through audit committeesdirectly or through audit committees

K M l Bi lK M l Bi l


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Kumar Mangalam BirlaKumar Mangalam Birla

Committee, 1999Committee, 1999

SEBI appointed the Birla committee in 1999 toSEBI appointed the Birla committee in 1999 tosuggest steps to promote and raise standards ofsuggest steps to promote and raise standards of

corporate governance. The Birla report containedcorporate governance. The Birla report contained

both mandatory and non-mandatoryboth mandatory and non-mandatory

recommendations.recommendations.

Mandatory recommendationsMandatory recommendations1.1. Applicable to all listed companies with paid up shareApplicable to all listed companies with paid up share

capital of Rs. 3 crore and abovecapital of Rs. 3 crore and above

2.2. The board should have an optimum combination ofThe board should have an optimum combination of

executive and non-executive directors: 1/3executive and non-executive directors: 1/3

independent directors when there is a non-executiveindependent directors when there is a non-executive

chairmanchairman50% independent directors when chairman is executive50% independent directors when chairman is executive


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Birla Committee defines independentBirla Committee defines independentdirectors as directors who apart fromdirectors as directors who apart from

receiving directors remuneration doreceiving directors remuneration do

not have any material pecuniarynot have any material pecuniary

relationship or transactions with therelationship or transactions with the

company, its promoters, itscompany, its promoters, its

management, or its subsidiaries,management, or its subsidiaries,

which in the judgment of the board,which in the judgment of the board,may affect independent judgment ofmay affect independent judgment of

the directors.the directors.


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3.3. Audit CommitteeAudit CommitteeThe audit committee should haveThe audit committee should havethree members, all being non-three members, all being non-executive directors with a majorityexecutive directors with a majority

being independent and at least onebeing independent and at least onedirector having financial anddirector having financial andaccounting knowledge.accounting knowledge.

The audit committee is expected toThe audit committee is expected to

enhance the credibility of theenhance the credibility of thefinancial disclosures and promotefinancial disclosures and promotetransparency by meeting thetransparency by meeting thefollowing stipulations:following stipulations:


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a.a. Company will continue business in the followingCompany will continue business in the followingyearyear

b.b. The accounting policies and principles conform toThe accounting policies and principles conform tostandard practicestandard practice

c.c. The management is responsible for theThe management is responsible for the

preparation, integrity, and fair presentation ofpreparation, integrity, and fair presentation offinancial statements and other informationfinancial statements and other informationcontained in the annual report. Besides thecontained in the annual report. Besides thechairman should be an independent director andchairman should be an independent director andmust be present at the AGM to answermust be present at the AGM to answershareholder queriesshareholder queries

d.d. The audit committee should meet at least thriceThe audit committee should meet at least thricein an year with a gap of not more than sixin an year with a gap of not more than sixmonthsmonths

e.e. The audit committee should function as a bridgeThe audit committee should function as a bridgebetween the board, the statutory auditors, andbetween the board, the statutory auditors, andinternal auditorsinternal auditors


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4.4. Remuneration Committee:Remuneration Committee: The boardThe board

should decide the remuneration of theshould decide the remuneration of the

non-executive directors. Full disclosure ofnon-executive directors. Full disclosure of

the remuneration package of all thethe remuneration package of all the

directors covering salary, bonuses, stock-directors covering salary, bonuses, stock-

options, pension fixed components,options, pension fixed components,

performance linked incentives, etc. is toperformance linked incentives, etc. is tobe made in the section concerningbe made in the section concerning

corporate governance of the annualcorporate governance of the annual

reportreport


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5.5. Boards should met at least four times inBoards should met at least four times inan year, with a maximum time gap ofan year, with a maximum time gap offour months. Minimum information offour months. Minimum information ofannual operating plans, and capitalannual operating plans, and capitalbudgets, quarterly results, minutes ofbudgets, quarterly results, minutes of

meetings of audit and other committees ,meetings of audit and other committees ,information on recruitment andinformation on recruitment andremuneration of senior officers ,remuneration of senior officers ,significant labor problems, materialsignificant labor problems, materialdefaults in financial obligations, statutorydefaults in financial obligations, statutorycompliances etc should be placed beforecompliances etc should be placed beforethe board.the board.

A director should not be a member inA director should not be a member inmore than ten committees and act asmore than ten committees and act as

chairman of more than five committeeschairman of more than five committees


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6.6. The Directors report shouldThe Directors report shouldcover industry structure, threats andcover industry structure, threats and

opportunities, segment-wise or product-opportunities, segment-wise or product-

wise performances, risks, internalwise performances, risks, internalcontrol systemscontrol systems

7. Shareholders should be provided with7. Shareholders should be provided with

sufficient information about thesufficient information about the

background and qualifications of newbackground and qualifications of new

directors and those are getting re-directors and those are getting re-

appointedappointed


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Non-mandatory recommendations:Non-mandatory recommendations:

1.1. Chairman of the boardChairman of the boardThe role of the chairman of the boardThe role of the chairman of the board

in principle has to be different fromin principle has to be different from

that of the CEO though samethat of the CEO though same

executive can perform both roles. Aexecutive can perform both roles. A

non-executive chairman should benon-executive chairman should be

provided with an office on companyprovided with an office on company

expenses and all official expensesexpenses and all official expenses

should be reimbursed.should be reimbursed.


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2. Remuneration committee2. Remuneration committeeThe board should set up aThe board should set up aremuneration committee toremuneration committee todetermine specific remunerationdetermine specific remunerationpackage for executive directorspackage for executive directorsincluding pension rights and otherincluding pension rights and othercompensation payments if any. Thecompensation payments if any. Thecommittee should have at least threecommittee should have at least threenon-executive directors and thenon-executive directors and the

chairman has to be an independentchairman has to be an independentdirector. All directors should bedirector. All directors should bepresent in all meetings. Thepresent in all meetings. Thechairman of the committee should bechairman of the committee should bepresent in the AGM to answerpresent in the AGM to answer

questions from shareholders.questions from shareholders.


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3. Shareholders rights3. Shareholders rightsHalf-yearly declaration of financialHalf-yearly declaration of financialperformance including summary of theperformance including summary of thesignificant events in the 6 months shouldsignificant events in the 6 months shouldbe sent to all shareholders.be sent to all shareholders.

4.4. Postal ballotPostal ballot

Shareholders who are unable toShareholders who are unable toattendattendgeneral meetings should be permitted togeneral meetings should be permitted tovote by postal ballot on key issues likevote by postal ballot on key issues like

following:following: AlterationAlterationin the memorandumin the memorandumofof

association such in the case of changes inassociation such in the case of changes inname, objects, address of registeredname, objects, address of registeredoffice etc.office etc.


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Sale of whole or substantially the whole ofSale of whole or substantially the whole ofthe undertakingthe undertaking

Sale of investments in the companies,Sale of investments in the companies,where shareholding or the voting rights ofwhere shareholding or the voting rights ofthe company exceeds 25%the company exceeds 25%

Making further issue of shares throughMaking further issue of shares throughpreferential allotment or private placementpreferential allotment or private placementbasisbasis

Corporate restructuringCorporate restructuring Entering a new business area not germaneEntering a new business area not germane

to the existing business of the companyto the existing business of the company Variations in rights attached to class ofVariations in rights attached to class of

securitiessecurities Matters relating to change in managementMatters relating to change in management

ares an raares an ra


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ares an raares an raCommittee Report - 2002Committee Report - 2002

This committee was appointed by theThis committee was appointed by theDepartment of Company Affairs. ItsDepartment of Company Affairs. Itsreport dealt with:report dealt with:

1.1. The auditor-company relationshipThe auditor-company relationship

2.2. Disqualifications for audit assignmentsDisqualifications for audit assignments3.3. List of prohibited non-audit servicesList of prohibited non-audit services

4.4. Independence standards for consultingIndependence standards for consulting

5.5. Compulsory audit partner rotationCompulsory audit partner rotation

6.6. Auditors disclosure of contingentAuditors disclosure of contingentliabilitiesliabilities

7.7. Auditors disclosure of qualifications andAuditors disclosure of qualifications andconsequent actionconsequent action


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8. Managements certification in8. Managements certification inthe event of auditorsthe event of auditors

replacementreplacement

9. Auditors annual certification of independence9. Auditors annual certification of independence

10.Appointment of auditors10.Appointment of auditors

11.Certification of annual audited accounts by CEO11.Certification of annual audited accounts by CEOand CFOand CFO

12. Auditing the auditors12. Auditing the auditors

13. Setting up of the independent quality review13. Setting up of the independent quality reviewboardboard

14. Proposed disciplinary mechanism for auditors14. Proposed disciplinary mechanism for auditors15. Independent directors15. Independent directors


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16. Audit committee charter16. Audit committee charter

17. Exempting non-executive17. Exempting non-executive

directors from certaindirectors from certain

liabilitiesliabilities18. Training of independent18. Training of independent

directorsdirectors

19. Establishment of serious corporate19. Establishment of serious corporatefraud officefraud office

20. SEBI and subordinate legislation20. SEBI and subordinate legislation


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It did not make any distinction between aIt did not make any distinction between aboard with a executive chairman or non-board with a executive chairman or non-executive chairman. Either way the boardexecutive chairman. Either way the boardshould be comprised of at least 50%should be comprised of at least 50%independent directorsindependent directors

In regard to audit committees, NareshIn regard to audit committees, NareshChandra report recommended that all auditChandra report recommended that all auditcommittee members should becommittee members should beindependent directors (Birla report hadindependent directors (Birla report had

recommended that audit committeesrecommended that audit committeesshould have non-executive directors withshould have non-executive directors withat least two of them being independentat least two of them being independentdirectors)directors)


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In a move that could affect small audit firms, it hadIn a move that could affect small audit firms, it hadrecommended that along with its subsidiaryrecommended that along with its subsidiaryassociates or affiliated entities, an audit firm shouldassociates or affiliated entities, an audit firm shouldnot derive more than 25% of business from a singlenot derive more than 25% of business from a singlecorporate client.corporate client.

The report stressed that the partners and at leastThe report stressed that the partners and at least

50% of the audit team should be rotated once in50% of the audit team should be rotated once inevery five yearsevery five years It drew up a list of prohibited non-audit servicesIt drew up a list of prohibited non-audit services It said that nominees of institutions (FIs) cannot beIt said that nominees of institutions (FIs) cannot be

counted as independent directorscounted as independent directors Because of the worry that many good andBecause of the worry that many good and

competent persons may not opt for independentcompetent persons may not opt for independentdirectorships in the boards, it recommended thatdirectorships in the boards, it recommended thatthese directors should be exempt from the civil andthese directors should be exempt from the civil andcriminal liabilities under the companies act.criminal liabilities under the companies act.

arayana ur yarayana ur y


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arayana ur yarayana ur yCommittee Report - 2003Committee Report - 2003

SEBI set up the N R Narayana MurthySEBI set up the N R Narayana MurthyCommittee in February, 2003. ItsCommittee in February, 2003. Its

terms of reference were:terms of reference were:

1.1. To review the performance of theTo review the performance of the

corporate governancecorporate governance

2.2. To determine the role of companies inTo determine the role of companies in

responding to rumor and other priceresponding to rumor and other price

sensitive information circulating in thesensitive information circulating in the

market in order to enhance themarket in order to enhance the

transparency and integrity of thetransparency and integrity of the

marketmarket

Narayana Murthy CommitteeNarayana Murthy Committee


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Narayana Murthy CommitteeNarayana Murthy Committee

-mandatory recommendations-mandatory recommendations

Audit Committee the bedrockAudit Committee the bedrockof quality governanceof quality governance

Recommended a bigger role forRecommended a bigger role for

audit committeesaudit committees It required that auditIt required that audit

committees should review thecommittees should review the

following information asfollowing information asmandatory:mandatory:


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1.1. Financial statements and draftFinancial statements and draftaudit reports includingaudit reports includingquarterly/half yearly informationquarterly/half yearly information

2.2. Management discussion andManagement discussion and

analysis of financial condition andanalysis of financial condition andthe results of the operationsthe results of the operations

3.3. Report relating to compliance withReport relating to compliance withlaws and risk managementlaws and risk management

4.4. Management letters of internalManagement letters of internalcontrol weaknesses issued bycontrol weaknesses issued bystatutory internal auditorsstatutory internal auditors

5.5. Records of related partyRecords of related partytransactionstransactions


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Related party transactionsRelated party transactions affirm the affirm thebases of related parties and insist on formalbases of related parties and insist on formalapproval of any transactions that are not onapproval of any transactions that are not onarms length basisarms length basis

Proceeds from initial public offerings Proceeds from initial public offerings

companies should disclose to the auditcompanies should disclose to the auditcommittees the uses and application of thecommittees the uses and application of thefunds under major heads on a quarterlyfunds under major heads on a quarterlybasisbasis

Risk management Risk management The boards of theThe boards of thecompanies should be made fully aware ofcompanies should be made fully aware of

the risks involved in the business andthe risks involved in the business andshareholders should know about the processshareholders should know about the processby which companies manage their risks-by which companies manage their risks-Management should place before the entireManagement should place before the entireboard a report every quarter the businessboard a report every quarter the businessrisks faced by the companiesrisks faced by the companies


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Code of Conduct the committeeCode of Conduct the committeerecommended that it should berecommended that it should beobligatory for the board to layobligatory for the board to laydown a code of conduct for alldown a code of conduct for allboard members and seniorboard members and seniormanagement of the company.management of the company.The code should be put up on theThe code should be put up on thecompany website and allcompany website and allmembers and seniormembers and senior

management should affirmmanagement should affirmcompliance on annual basis. Thecompliance on annual basis. Theannual report contain aannual report contain adeclaration to this effect signeddeclaration to this effect signedby the CEO and COO.by the CEO and COO.


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Nominee Directors Nominee Directors the reportthe reportrecommended doing away withrecommended doing away withnominee directors. If corporationsnominee directors. If corporationswant such directors, the appointmentwant such directors, the appointmentshould be by the shareholders. Andshould be by the shareholders. Andin case such directors are appointedin case such directors are appointedthey will have the samethey will have the sameresponsibilities of other directors andresponsibilities of other directors andwould be liable to all those applicablewould be liable to all those applicable

to other directors of the company.to other directors of the company.The same conditions are to beThe same conditions are to beapplicable to the nominees of theapplicable to the nominees of thegovernment in public sectorgovernment in public sectorcompanies.companies.


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Other recommendations Other recommendations Compensation to non-executiveCompensation to non-executive

directors are to be approved bydirectors are to be approved by

the shareholders in the generalthe shareholders in the generalmeetings (restrictions placed onmeetings (restrictions placed on

stock options; full details ofstock options; full details of

compensation to be disclosed)compensation to be disclosed) Whistle blower policy to be inWhistle blower policy to be in

place in a companyplace in a company

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