ROLE OF SEBI IN CORPORATE GOVERNANCE

AGENDA

EVOLUTION : CORPORATE GOVERNANCEINTRODUCTION GLOBAL INITIATIVES INDIAN INITIATIVES KUMAR MANGALAM BIRLA COMMITTEE MANDATORY RECOMMENDATION NON-MANDATORY RECOMMENDATIONS CASE STUDY: SATYAM LTD

EVOLUTION: CORPORATE GOVERNANCE

EVOLUTION : CORPORATE GOVERNANCE

History records Pataliputra, the capital of the Mauryan Empire, as a city “astonishingly well organised and administered according to the best principles of governance”.

Writing about the ideal conduct of the King Kautilya,an official says an ideal king is one for whom-

“In the happiness & well being of the subjects, is the well being of the king,

In the Welfare of the subjects, lies the welfare of the King,

What is desirable and beneficial to the subjects and not his personal desires and ambitions is desirable and beneficial to the King”

Kautilya further elaborates on the fourfold duty of a King as: Raksha or Protection Vruddhi or Enhancement Palana or Maintaineance Yogakshema or Safeguard

The substitution of the state with the company, the King with the CEO oe the Board of the Company & the subjects with the Shareholders, brings out the spirit of the Corporate Governance

So, the fourfold duties of the King/CEO/Board of a Company can be interpreted to imply-

Raksha or Protection - Shareholders Wealth Vruddhi or Enhancement - Wealth through proper utilisation of assets Palana or Maintaineance - Of that Wealth Yogakshema or Safeguard - Interest of the Shareholders

INTRODUCTION

What is Corporate GovernanceIt means Governing a Company in a Valued based manner

Objective:

Enhancement of shareholders value keeping in view the interests of other stakeholders

Key Constituents Shareholders Board of Directors Management

Corporate Governance involves Promoting- Transparency – Everything that happens in the company, if it is not shy to

share it publicly, it is transparent. Accountability – The management is accountable for its decisions Equanimity – (Equitable Treatment) Rights of all shareholders are equal,

of minor or major shareholding.

It involves letting Investors know how the company in which they have invested is utilizing their money.

Benefits of Corporate Governance:

Good Corporate Governance practices, Companies can reduce vulnerability to Financial Crisis.

Studies world over have shown

- Markets & Investors – take notice of well managed companies

- Respond and rely on them

- Reward such companies with higher valuation

Some Perturbing Facts

The Directors Remuneration was Rs. 1.85 lakhs a year & the method of

Remuneration was also questionable.

The Company has paid Rs. 200 lakhs as Cash Bonus in the year though the

net income was only Rs. 360 lakhs.

Rs. 10 lakhs of the company money has been used to find a lavish birthday

party of one of the Director’s Wife.

The Percent holding of the three Directors was unclear.

Loans given to Directors were written off.

GLOBAL INITIATIVES

GLOBAL INITIATIVES TO IMPOSE CORPORATE GOVERNANCE

A number of committees were set up to look into various aspects of Corporate Governance these includes:

- Sir Adrian Cadbury Committee on Financial Aspects of Corporate Governance(1992)

- Mervyn E King’s Committee on Corporate Governance(1994)- Jenkins Report, US (Sept, 1994). - Toronto Stock Exchange Report, Canada (Dec.1994)- Greenbury Committee on Directors Remuneration(1995)- Hampel Report,UK (Dec,1997)- Business Round Table(BRT) Statement on Corporate Governance(1997)- Hampel Committee on Corporate Governance(1998)- Blue Ribbon Committee on improving the Effectiveness of Audit

Committee(1999)- CACG Principles for Corporate Governance in Commonwealth(1999)- Blue Ribbon Commisson Report, US,2000

INDIAN INITIATIVES

INDIAN INITIATIVES TO IMPOSE CORPORATE GOVERNANCE

Following committees were set up to look into various aspects of Corporate Governance these includes:

- Kumar Mangalam Birla Committee(1999)- The Naresh Chandra Committee(2002)- The Narayan Murthy Committee(2003)

Clause 49 of the Listing Agreement, which deals with Corporate Governance that a listed entity should follow was 1st introduced in the F.Y.2000-01 based on the recommendations of Birla Committee.

After these recommendations were in place for about 2yrs, SEBI in order to evaluate the adequacy of the existing pratices set up Narayana Murthy Committee, which after holding 3 meetings submitted a Draft recommendations on Corporate Governance norms accordingly Clause 49 of Listing Agreement was revised but industry had some objections which forced the Murthy Committee to revise Clause 49 again.

This revised recommendations have considerably diluted the Original Murthy Committee recommendations.

Areas where major changes were made include: Subsidiary Companies

It highlights Board Composition & other requirements CEO/CFO Certification:

This is a new requirement & is based on the Sarbanes Oxley Act of USA.The revised Clause requires a CEO & CFO to certify to the Board,the Annual Financial Statements in the prescribed format.

Few new items have been added under non-mandatory requirements which are as follows: Audit Qualifications

Company may move towards a regime of unqualified financial statements Training of Board Members Mechanism for evaluating non-executive Board members

Performance evaluation of non-executive directors by a peer group comprising the entire board..

Whistle Blower Policy

It plays a very important role in providing information about corruption and mal- administration. A whistleblower is an employee or ex-employee who provides information about ones company which one believes provides evidence of –

A violation of a law or regulation by the company

Financial malpractices

A danger to public health & safety.

KUMAR MANGALAM BIRLA COMMITTEE

Kumar Mangalam Committee’s Recommendations

Kumar Mangalam Committee’s Recommendations

Mandatory RecommendationsNon-Mandatory

Recommendations

• Board Composition• Audit Committee Composition• Board Role• Audit Committee • Critical Information• Shareholders Communication

• Remuneration Committee• Financial Performance Declaration • Non-Executive Chairperson

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

B O A R D C O M P O S I T I O N

Board of Directors should comprise

Executive Directors

Non-Executive DirectorsMinimum 50% of such directors if Chairman is

ExecutiveMinimum 1/3rd of such directors if Chairman is Non-ExecutiveAmong such directors the independent directors should not have any material or peculiarly relationship or transaction with the company, its Promoters, Management or Subsidiaries

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Board CompositionA U D I T C O M M I T T E E C O M P O S I T I O N Company Board should setup a qualified and independent audit committee comprising minimum 3 members

All being non-executive directors and majority being Independent Atleast 1 director should have financial & accounting knowledge.

Audit Committee Chairman should be

Independent Director Present at the Company AGM Company Secretary should act as the Secretary to the Audit

Committee

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Board CompositionAudit Committee CompositionB O A R D R O L E

Board Meeting should be held atleast 4 times a year i.e., once every Quarter Board of Directors should decide the remuneration of non-executive director. Full Disclosure should be made regarding the remuneration packages of all directors. Director

Can be member in maximum 10 committees OR

Act as Chairman in maximum 5 committees across all Company in which he is a Director.

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Board CompositionAudit Committee CompositionBoard RoleA U D I T C O M M I T T E E R O L E

Meet atleast thrice a year. Have Power to investigate any Activity within its terrms of reference. Review

Any change in Accounting Policies & Practices. Compliance with Accounting Standards Stock Exchange & Legal RequirementsAdequacy of Internal Control Systems Company’s Financial & Risk Management Policies

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Board CompositionAudit Committee CompositionBoard RoleAudit Committee RoleC R I T I C A L I N F O R M A T I O N

Directors would need to disclose their membership with other committees of the board Management must disclose to the Board all information pertaining to

Material Transaction Financial Transaction Commercial Transaction

Incase of Appointment & Re-Appointment of Director, the shareholder must be provided with a brief resume of the Director covering

His ExpertiseThe names of the companies in which he holds directorship.

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Board CompositionAudit Committee CompositionBoard RoleAudit Committee RoleCritical Information S H A R E H O L D E R C O M M U N I C A T I O N

A board Committee should be formed to redress Shareholders Complaints regarding

Transfer of Shares Non Receipt of Balance sheet, Dividend & so on

There should be a separate section on Corporate Governance in the Annual Report Compliance Report.

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

R E M U N E R A T I O N C O M M I T T E E

Board should setup such a committee to determine the Company’s Policy on Remuneration Packages for Executive Director.

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Remuneration CommitteeF I N A N C I A L P E R F O R M A N C E D E C L A R A T I O N

Shareholders should be sent declarations of Financial Performance half yearly including the summary of the significant Events in the Last six months.

R e c o m m e n d a t i o n s

Mandatory RecommendationsNon-Mandatory

Recommendations

Remuneration CommitteeFinancial Performance DeclarationN O N - E X E C U T I V E C H A I R P E R S O N

A Non-Executive Chairperson should be entitled to maintain an office at the Company’s Expense.

STATISTICS

TOP 5 COMPANY’S : CORPORATE GOVERNANCE

COMPANY’S (2006)

• Abhishek Industries ltd.

• Bajaj Auto Ltd.• Bharat Forge Ltd.• Chennai Petroleum

Corp. Ltd• Clariant Chemicals

(India) Ltd.

COMPANY’S (2005)

•Abhishek Industries ltd. •Bajaj Auto Ltd.•Bharat Tele-Ventures Ltd.•Canara Bank•Clariant (India) Ltd.

COMPANY’S (2004)

•Abhishek Industries ltd. •Adnani Exports Ltd.•Bajaj Auto Ltd.•Bharat Petroleum Corp. Ltd•Canara Bank

SOURCE : www.icsi.edu