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CHAPTER 1: INTRODUCTIONCorporate governance is the set of processes, customs, policies, laws, and institutions

affecting the way a corporation (or company) is directed, administered or controlled. Corporate

governance also includes the relationships among the many stakeholders involved and the goals forwhich the corporation is governed. In simpler terms it means the extent to which companies are run

in an open & honest manner.

Corporate governance has three key constituents namely: the Shareholders, the Board of Directors &the Management. Other stakeholders include employees, customers, creditors, suppliers, regulators,and the community at large. The concept of corporate governance identifies their roles &responsibilities as well as their rights in the context of the company. It emphasizes accountabilitytransparency & fairness in the management of a company by its Board, so as to achieve sustainedprosperity for all the stakeholders.

Corporate governance is a synonym for sound management, transparency & disclosure

Transparency refers to creation of an environment whereby decisions & actions of the corporate aremade visible, accessible & understandable. Disclosure refers to the process of providing informationas well as its timely dissemination.

1.1 Background

As mentioned earlier, the term corporate governance is related to the extent to which the companies are

transparent & accountable about their business. Corporate governance today has become a major issue of

interest in most of the corporate boardrooms, academic circles & even governments around the globe.

In the 20th century, in the immediate aftermath of the Wall Street Crash of 1929, legal scholars such as

Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern

corporation in society. From the Chicago school of economics, Ronald Coase's "The Nature of the Firm"(1937) introduced the notion of transaction costs into the understanding of why firms are founded and how

they continue to behave. Fifty y`ears later, Eugene Fama and Michael Jensen's "The Separation of

Ownership and Control" (1983, Journal of Law and Economics) firmly establishedagency theory as a way of

understanding corporate governance: the firm is seen as a series of contracts. Agency theory's dominance

was highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory: an assessement and review",

Academy of Management Review).

In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press

attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California

Public Employees' Retirement System (CALPERS) led a wave of institutional shareholder activism (something

only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now

traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained

issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies ofThailand, Indonesia, South Korea, Malaysia and

The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack 2of

corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their

economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) ofEnron and Worldcom, as well as

lesser corporate debacles, such as Adelphia Communications, AOL, Qwest, Arthur Andersen, Global Crossing

Tyco, etc. led to increased shareholder and governmental interest in corporate governance. Because these

triggered some of the largest insolvencies, the public confidence in the corporate sector was sapped. The
http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929http://en.wikipedia.org/wiki/Adolf_Augustus_Berlehttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/The_Nature_of_the_Firmhttp://en.wikipedia.org/wiki/Eugene_Famahttp://en.wikipedia.org/wiki/Michael_Jensenhttp://en.wikipedia.org/wiki/Agency_theoryhttp://en.wikipedia.org/w/index.php?title=Kathleen_Eisenhardt&action=edit&redlink=1http://en.wikipedia.org/wiki/IBMhttp://en.wikipedia.org/wiki/Kodakhttp://en.wikipedia.org/wiki/Honeywellhttp://en.wikipedia.org/wiki/CalPERShttp://en.wikipedia.org/wiki/CalPERShttp://en.wikipedia.org/wiki/Options_backdatinghttp://en.wikipedia.org/wiki/East_Asian_Financial_Crisishttp://en.wikipedia.org/wiki/Thailandhttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/The_Philippineshttp://en.wikipedia.org/wiki/Enronhttp://en.wikipedia.org/wiki/Worldcomhttp://www.washingtonpost.com/wp-dyn/articles/A39143-2004Jul9.htmlhttp://en.wikipedia.org/wiki/AOLhttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Global_Crossinghttp://en.wikipedia.org/wiki/Tyco_Internationalhttp://en.wikipedia.org/wiki/Tyco_Internationalhttp://en.wikipedia.org/wiki/Global_Crossinghttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/AOLhttp://www.washingtonpost.com/wp-dyn/articles/A39143-2004Jul9.htmlhttp://en.wikipedia.org/wiki/Worldcomhttp://en.wikipedia.org/wiki/Enronhttp://en.wikipedia.org/wiki/The_Philippineshttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Thailandhttp://en.wikipedia.org/wiki/East_Asian_Financial_Crisishttp://en.wikipedia.org/wiki/Options_backdatinghttp://en.wikipedia.org/wiki/CalPERShttp://en.wikipedia.org/wiki/CalPERShttp://en.wikipedia.org/wiki/Honeywellhttp://en.wikipedia.org/wiki/Kodakhttp://en.wikipedia.org/wiki/IBMhttp://en.wikipedia.org/w/index.php?title=Kathleen_Eisenhardt&action=edit&redlink=1http://en.wikipedia.org/wiki/Agency_theoryhttp://en.wikipedia.org/wiki/Michael_Jensenhttp://en.wikipedia.org/wiki/Eugene_Famahttp://en.wikipedia.org/wiki/The_Nature_of_the_Firmhttp://en.wikipedia.org/wiki/Ronald_Coasehttp://en.wikipedia.org/wiki/Adolf_Augustus_Berlehttp://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929


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popular perception was that corporate leadership was fraught with greed & excess. Inadequancies & failure

of the existing systems, brought to the fore, the need for norms & codes to remedy them. This resulted in

the passage of the Sarbanes-Oxley Act of 2002, (popularly known as Sox) by the United States.

In India however, only when the Securities Exchange Board of India (SEBI), introduced Clause 49 in the

Listing Agreement, for the first time in the financial year 2000-2001, that the listed companies started

embracing the concept of corporate governance. This clause was based on the Kumara Mangalam Birla

Committee constituted by SEBI. After these recommendations were in place for about four years, SEBI, in

order to evaluate & improve the existing practices, set up a committee under the Chairmanship of Mr. N.R.

Narayana Murthy during 2002-2003.At the same time, the Ministry of Corporate Affairs set up a committee

under the Chairmanship of Shri. Naresh Chandra to examine the various corporate governance issues. The

recommendations of the committee however, faced widespread protests & representations from the

industry, forcing SEBI to revise them.

Finally, on the 29th

October, 2004, SEBI announced the revised Clause 49, which was implemented by the

end of the financial year 2004-2005. Apart from Clause 49 of the Listing Agreement, corporate governance i

also regulated through the provisions of the Companies Act, 1956. The respective provisions have been

introduced in the Companies Act by Companies Amendment Act, 2000.

Objectives

Transparency of corporate governance across indias multinational companies.

Checking the challenges faced by indian multinational companies for practising the bestcorporate governance practises.

To determine the companies who have committed fraud inspite of followng the bestcorporate governance practises.

Studying about a few companies who have followed the best corporate governaancepractises in the recent past.

Definitions of Corporate Governance

"Corporate governance is a field in economics that investigates how to secure/motivate

efficient management of corporations by the use of incentive mechanisms, such as contracts

organizational designs and legislation. This is often limited to the question of improving

financial performance, for example, how the corporate owners can secure/motivate that the
http://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Act


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corporate managers will deliver a competitive rate of return

Corporate governance deals with the ways in which suppliers of finance to corporations

assure themselves of getting a return on their investment.2

Review of literature

Empirical studies have been conducted in various countries on whether there is any link between thecorporate governance / board composition and corporate performance. Some researchers had lookedfor a direct evidence of a link between board composition and corporate performance. Many foreignresearchers have tried to study the correlation between the Corporate Governance and firmsperformance.

Much of the previous literature has shown a positive relationship between governance and firmperformance assuming that governance is an independent regressor, i.e. it is exogenously

determined, in a firm performance regression. This would suggest that firms are not in equilibrium,and improvements in governance would lead to improvements in firm performance.On the other hand, Demsetz and Lehn (1985), among others, have shown that governance is relatedto observable firm and CEO characteristics.Several studies have examined the separation of CEO and chairman, positing that agency problemsare higher when the same person holds both positions.The question of how corporate governance and board characteristics such as composition or size orquality related to profitability or performance are still remains unresolved.Yet, the recommendation of the Securities and Exchange Board of India committee on CorporateGovernance under the Chairmanship of Kumar Mangalam Birla (1999), The Naresh ChandraCommittee (2002), and the Securities and Exchange Board of India Committee on corporate.

Governance under the Chairmanship of N R Narayanamurthy (2003) are in favour of improving thecorporate governance scenario in India by favouring majorityindependent directors board.

1www.encycogov.com, Mathiesen [2002].2

The Journal of Finance, Shleifer and Vishny [1997]


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Benefits And Limitations

The concept of corporate governance has been attracting public attention for quite some time. It

contributes not only to the efficiency of a business enterprise, but also, to the growth and progressof a country's economy. Progressively, firms have voluntarily put in place systems of goodcorporate governance for the following reasons:

In today's globalised world, corporations need to access global pools of capital as well asattract and retain the best human capital from various parts of the world. Under such ascenario, unless a corporation embraces and demonstrates ethical conduct, it will not be ableto succeed.

The credibility offered by good corporate governance procedures also helps maintain theconfidence of investorsboth foreign and domesticto attract more long-term capital. Thiswill ultimately induce more stable sources of financing.

corporation is a congregation of various stakeholders, like customers, employees, investors,vendor partners, government and society. Its growth requires the cooperation of all the

stakeholders. Hence it imperative for a corporation to be fair and transparent to all itsstakeholders in all its transactions by adhering to the best corporate governance practices.

Good Corporate Governance standards add considerable value to the operationalperformance of a company by:

1. improving strategic thinking at the top through induction of independent directorswho bring in experience and new ideas;

2. rationalizing the management and constant monitoring of risk that a firm faces

globally; limiting the liability of top management and directors by carefully

articulating the decision making process;3. assuring the integrity of financial reports, etc.

It also has a long term reputational effects among key stakeholders, both internally and externally.

Effective governance reduces perceived risks, consequently reduces cost of capital andenables board of directors to take quick and better decisions which ultimately improvesbottom line of the corporates.

Adoption of good corporate governance practices provides long term sustenance andstrengthens stakeholders' relationship.

A good corporate citizen becomes an icon and enjoy a position of respects. Potential stakeholders aspire to enter into relationships with enterprises whose governance

credentials are exemplary. Adoption of good corporate governance practices provides stability and growth to the

enterprise. Effectiveness of corporate governance system cannot merely be legislated by law neither

can any system of corporate governance be static. As competition increases, theenvironment in which firms operate also changes and in such a dynamic environment thesystems of corporate governance also need to evolve. Failure to implement good governanceprocedures has a cost in terms of a significant risk premium when competing for scarcecapital in today's public markets.


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CHAPTER 2: NATIONAL AND

INTERNATIONAL SCENARIO

MAJOR DEVELOPMENTS AT INTERNATIONAL LEVELS

Since the mid-1990s, at international level, various corporate governance reports, guidelines andregulations have come into existence.

In this project the emphasis has been made on the following major international developments incorporate governance:

Cadbury Committee Report

OECD PrinciplesThe Sarbanes-Oxley Act 2002

1:Cadbury Committee Report on Corporate GovernanceIn an attempt to prevent the recurrence of business failures in countries like UK and to raise thestandards of corporate governance, the Cadbury Committee, under the chairmanship of Sir AdrianCadbury, was set up by the London Stock Exchange in May 1991.

The Committee investigated accountability of the Board of Directors to shareholders and to thesociety. The resulting report, and associated Code of Best Practices, published in December 1992,

was generally well received. The Cadbury Code of Best Practices had 19 recommendations. Therecommendations are in the nature of guidelines relating to the Board of Directors, Non-executiveDirectors, Executive Directors and those on Reporting & Control.

2: Organization for Economic Co-operation and Development

(OECD)PrinciplesOrganization for Economic Co-operation and Development (OECD)Principles OECD is a unique forumwhere the governments of 30 market democracies work together to address the economic, social and

governance challenges of globalization as well as to exploit its opportunities. The organization provides asetting where governments can compare policy experiences, seek answers to common problems, identify goodpractices and co-ordinate domestic and international policies.

The OECD Council, meeting at Ministerial level on 27-28 April 1998, called upon the OECD todevelop, in conjunction with national governments, other relevant international organizations and theprivate sector, a set of corporate governance standards and guidelines. In order to fulfill thisobjective, the OECD established the ad-hoc Task Force on Corporate Governance to develop a set ofnon-binding principles that embody the views of Member countries on this issue.

The Principles contained in this document build upon experiences from national initiatives inMember countries and previous work carried out within the OECD, including that of the OECD


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Business Sector Advisory Group on Corporate Governance. Such principles were based essentiallyon the existing legal and regulatory arrangements as well as the best prevailing practices followed bymarket participants in the OECD countries.

The OECD revised its principles of corporate governance in the year 2004, which reflects a globalconsensus regarding the importance of good governance practices in contributing to economicviability and stability in economics.

3: The Sarbanes-Oxley ActSarbanes-Oxley Act is a US law passed in 2002 to strengthen corporate governance and restoreinvestor confidence. The Act was sponsored by US Senator Paul Sarbanes and US RepresentativeMichael Oxley.

Sarbanes-Oxley law passed in response to a number of major corporate and accounting scandalsinvolving prominent companies in the US. These scandals resulted in a loss of public trust inaccounting and reporting practices. In July 2002, the Sarbanes- Oxley Act popularly called SOX

was enacted. The Act made fundamental changes in virtually every aspect of corporate governanceand particularly in the matters of auditor independence, conflict of interest, corporate responsibilityand enhanced financial disclosures.

SOX is wide ranging and establishes new or enhanced standards for all US public company Boards,Management, and public accounting firms. SOX contains 11 titles, or sections, ranging fromadditional corporate board responsibilities to criminal penalties. It requires Security and ExchangeCommission (SEC) to implement rulings on requirements to comply with the new law.SOX consists of new standards for Corporate Boards and Audit Committee, new accountabilitystandards and criminal penalties for Corporate Management, new independence standards forExternal Auditors, a Public Company Accounting Oversight Board (PCAOB) under the Security and

Exchange Commission (SEC) to oversee public accounting firms and issue accounting standards.


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CORPORATE GOVERNANCEDEVELOPMENTS ININDIAIn India, a small beginning was made by the Confederation of Indian Industry (Cll) in the field ofgood corporate governance which is explained below.Thereafter, various committees have been constituted to give recommendations in this regard viz..Kumar Manglam Birla Committee, Naresh Chandra Committee, Narayana Murthy Committee etc.

1) Confederation of Indian Industry (CII)

In 1996, CII took a special initiative on Corporate Governance, the theme of such initiative was todevelop and promote a code for Corporate Governance to be adopted and followed by IndianCompanies, be it in the Private Sector or Public Sector, Banks or Financial Institutions, all of whichare corporate entities. A National Task Force was set up with Mr. Rahul Bajaj, as the Chairman andincluding members from industry, the legal profession, media and academia. This Task Force

presented the draft guidelines and Code for Corporate Governance in April 1997 at the NationalConference and Annual session of CII. After reviewing the various suggestions and thedevelopments which have taken place in India and abroad, the Task Force finalized the DesirableCorporate Governance Code.

2) Kumar Managlam Birla Committee

The SEBI appointed a Committee on Corporate Governance on May 7, 1999 under the chairmanshipof Shri Kumar Manglam Birla, to promote and raise the standards of corporate governance mainlyfrom the perspective of the investors and shareholders and to prepare a code to suit the Indiancorporate environment.

Such committee submitted its interim & final report in 1999/2000. The Committee made a numberof recommendations towards corporate governance which include constitution of audit committee,composition of Board of Directors, role of independent directors, & remuneration standard andfinancial reporting etc. On the basis of such recommendations clause 49 (preamended) of the listingagreement was issued by the SEBI.

3) Naresh Chandra CommitteeThe next development is constitution of a committee by Department of Company Affairs (DCA),

headed by Shri Naresh Chandra, called Naresh Chandra Committee on August 21, 2002, toexamine various issues of corporate governance relating to statutory auditor - company relationship,

rotation of statutory audit firm or partners, appointment of auditors and determination of audit fees,independence of auditing functions, certification of accounts and financial statements bymanagement and directors role of independent directors etc. Many recommendations of the reportwere incorporated in the Companies (Amendment) Bill 2003, which is currently being reviewed.


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4) Narayana Murthy CommitteeThereafter, SEBI constituted another committee called Narayana Murthy Committee under the

Chairmanship of N.R. Narayana Murthy comprising 23 persons, which included representativesfrom the stock exchanges, Chamber of Commerce, industry, investor associations and Professionalbodies, for reviewing implementation of the corporate governance code by listed companies.

Many of the recommendations made by such committee has been included in the revised Clause 49of the Listing Agreement. The Narayana Murthy Committee attempted to promulgate an effectiveapproach for successful corporate governance. The Committee submitted its final report on February8, 2003.

5) The Securities And Exchange Board Of IndiaSEBI vide its circular no. SEBI/CFD/DIL/CG/1/2004/ 12/10, Dated October 28, 2004 has revisedthe existing clause 49, related to corporate governance. The above circular has also amended manyof the exiting provisions of Clause 49 of the listing agreement and has introduced a number of new

requirements.The major changes in the new clause 49 include amendments/additions to provisions relating todefinition of independent directors, strengthening the responsibilities of audit committees, improvingquality of financial disclosures, including those related to related party transactions and proceedsfrom public/rights/preferential issues, requiring Boards to adopt formal code of conduct andrequiring CEO/CFO certification of financial statements, etc. Such a step, if properly implemented,will go a long way towards ensuring good governance practices in Indian Corporate Sector.

The implementation of the new Clause 49 as recommended by SEBI covers thefollowing entities:

(1) All entities seeking listing for the first time, at the time of seeking in principle approval for such

listing.(2) All companies which were required to comply with the erstwhile Clause 49 i.e. all listedcompanies having a paid-up share capital of Rs.3 crores & above or net worth of Rs.25 crores ormore at any time in the history of the company.


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CHAPTER 3: CONCEPTUAL

FRAMEWORK

3.1- Clause 49 Of The Listing Agreement

Clause 49 of the listing agreement: SEBI revise Clause 49 of the Listing Agreement pertaining to

corporate governance vide circular date October 29 th, 2004, which superseded all other earlier

circulars issued by SEBI on this subject. All existing listed companies were required to comply with

the provisions of the new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

The board will lay down a code of conduct for all board members and senior management of

the company to compulsorily follow.

The CEO an CFO will certify the financial statements and cash flow statements of the

company.

If while preparing financial statements, the company follows a treatment that is different

from that prescribed in the accounting standards, it must disclose this in the financial

statements, and the management should also provide an explanation for doing so in the

corporate governance report of the annual report.

The company will have to lay down procedures for informing the board members about the

risk management and minimization procedures.

Where money is raised through public issues etc., the company will have to disclose the uses/

applications of funds according to major categories ( capital expenditure, working capital

marketing costs etc) as part of quarterly disclosure of financial statements.

Further, on an annual basis, the company will prepare a statement of funds utilized for purposesother than those specified in the offer document/ prospectus and place it before the audit committee.

The company will have to publish its criteria for making its payments to non-executive directors in

its annual report. Clause 49 contains both mandatory and non-mandatory requirements.


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3.2- Steps Implemented By Companies Act With Regard To

Corporate Governance

The Ministry of Company Affairs appointed various committees on the subject of corporate

governance which lead to the amendment of the companies Act in 2000. These amendments aimedat increasing transparency and accountabilities of the Board of Directors in the management of the

company, thereby ensuring good corporate governance. The dealt with the following:

1. COMPLIANCE WITH ACCOUNTING STANDARDSSECTION 210A

As per this subsection inserted by the Companies Act, 1999 every profit and loss account

and balance sheet of the company shall comply with the accounting standards. The

compliance of Indian Accounting standards was made mandatory and the provisions for

setting up of National Committee on accounting standards were incorporated in the Act.

2. INVESTORS EDUCATION AND PROTECTION FUNDSECTION 205C

This section was inserted by the Companies Act 1999which provides that the central

government shall establish a fund called the Investor Education and protection Fund and

amount credited to the fund relate to unpaid dividend, unpaid matured deposits, unpaid

matured Debenture, unpaid application money received by the companies for allotment of

securities and due for refund and interest accrued on above amounts.

3. DIRECTORS RESPONSIBILITY STATEMENT- SECTION 217(2AA)

Subsection (2AA)added by the Companies Act, 2000 provides that the Boards report

shall also include a Directors Responsibility statement with respect to the following

matters:

a. Whether accounting standards had been followed in the preparation of annual

accounts and reasons for material departures, if any;

b. Whether appropriate accounting policies have been applied and on consistent basis;

c. Whether directors had made judgments and estimate that are reasonable prudent so as

to give a true and fair view of the state of affair and profit and loss of the company;

d. Whether the directors had prepared the annual accounts on a going concern basis.

e. Whether directors had taken proper and sufficient care for the maintenance of

adequate accounting records for safeguarding the assets of the company.


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4. NUMBER OF DIRECTORSHIPA- SECTION 275

As per this section of Companies Act, 2000 a person cannot hold office at same time as

director in more than fifteen companies.

5. AUDIT COMMITTEESSECTION 292A

This section of the companies Act, 2000 provides for the constitution of audit committees

by every public company having a paid- up capital of Rs. 5 crores or more. Audit

Committee is to consist of at least 3 directors. Two of the members of the Audit

Committee shall be directors other than managing or whole time director.

Recommendation of the Audit Committee on any matter related to financial management

including audit report shall be binding on the Board.

6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT

The Companies Act, 2000 has prohibited companies to invite/accept deposit from public.

7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA

The Companies Act, 2000 had added two new sections, viz, section a 58AA and 58AAA,

for the protection of small depositors. These provisions are designed to protect

depositors who have invested upto Rs. 20, 000 in a financial year in a company.

8. CORPORATE IDENTITY NUMBER

Registrar of Companies is to allot a Corporate Identity Number to each company

registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-2000)

9. POWERS TO SEBISECTION 22A

This section added Companies Act, 2000 empowers SEBI to administer the provisions

contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116, 117, 118, 119, 120

121, 122, 206, 206A and 207 so far as they relate to issue and transfer ofsecurities and

non payment of dividend. However, SEBIS power in this regard is limited to listed

companies.


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10.DISQUALIFICATION OF A DIRECTOR- SETION 274 CLAUSE (G)

Clause (g) of Section 2i7i4, added by the companies Act, 200 disqualifies a person who is

already director of a public company which (a) has not filed the annual accounts and

annual returns for any continuous three financial years commencing on and after the first

day of

April 1999; or (b) has failed or repay its deposit or interest thereon on due date or redeem

its debentures on due date or pay dividend and such failure to continues for one year or

more, however, the aforesaid disqualification will last for five years only.

11.SECRETARIAL AUDITSECTION383A

Secretarial Audit Section 383A was amended to provide for secretarial audit with respect

to companies having a paid up share capital of Rs. 10 lakhs or more but less than, present

Rs. 2 crores. As per the Companies Act, 2000 a whole time company secretary has to file

with ROC a certificate as to whether the company has complied with all the provisions of

the Act. A copy of this certificate shall also be attached with the report of Board of

Directors.


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CHAPTER 3: PRESENTATION OF DATA,ANALYSIS

Chosen Topics

*Corporate Governance Report Of Tata Steel Limitd (F.Y

2009-10);

*A Case Study On Satyam Computers(2009);

The Tata Steel LimitedCompanysCorporate Governance

Philosophy

The Company has set itself the objective of expanding its capacities and becoming

globally competitive in itsbusiness. As a part of its growth strategy, the Company believes

in adopting the bestpractices that are followed in the area of Corporate Governance

across various geographies. The Company emphasises the need for full transparency and

accountability in all its transactions, in order to protect the interests of its stakeholders.

TheBoard considers itself as a Trustee of its Shareholders and acknowledges its

responsibilities towards them for creation and safeguarding their wealth.

In accordance with the Tata Steel Group Vision,Tata Steel Group (theGroup) aspires to be

the global steel industry benchmark for value creation and corporate citizenship. The

Group expects to realise its Vision by taking suchactions as may be necessary in order to

achieve its goals of value creation, safety, environment andpeople.

Corporate Governance Report Of Tata Steel Limited

For The Year 2009-10The Company has a non-executive Chairman and the number ofIndependent Directors is 50% ofthe total numberof Directors. As on 31st March, 2010, the Company has 12 Directors on itsBoard, of which 6 Directors areindependent.The number of Non- Executive Directors (NEDs) is

more than 50% of the total number ofDirectors.The Company is in compliance with the Clause49 of the listing Agreement pertaining to compositions of directors.

None of the Directors on the Board is a Member on more than 10 Committees and Chairman ofmore than 5 Committees (as specified in Clause 49), across all the companies in which he is aDirector. The necessary disclosures regarding Committee positions have been made by theDirectors.

The names and categories of the Directors on the Board, their attendance at Board Meetingsduring the yearand at the last Annual General Meeting, as also the number of Directorships andCommittee Memberships heldby them in other companies are given below:


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Name Category No. ofBoard

Meetings

attended

during

2009-10

Whether

attended

AGM

held on

27th

August,

2009

No. of

Directorships

in other

publiccompanies

ason31.03.2010*

No. ofCommittee

positions held in

otherpublic

companies

as on31.03.2010**

Chairman Member Chairman MemberMr.R.N.Tata (Chairman)

Mr. B. Muthuraman

(Vice Chairman)#

Mr.James Leng

(Resigned w.e.f. 07.07.2009)

Mr. NusliN. Wadia

Mr. S. M. Palia

Mr.Suresh Krishna

Mr.Ishaat Hussain

Dr. J. J. Irani

Not Independent

Non-Executive

-do-

Independent

Non-Executive

-do-

-do-

-do-

Not Independent

Non-Executive-do-

8

9

1

8

9

5

9

9

Yes

Yes

N.A.

Yes

Yes

Yes

Yes

Yes

9

1

N.A.

3

4

2

3

1

2

N.A.

3

6

4

12

6

N.A.

3

2

3

1

N.A.

3

2

4

2

* Excludes Directorships in associations, private, foreign and Section 25 companies.

** Represents Chairmanships/Memberships of Audit Committee and Shareholders/InvestorsGrievance Committee.

# Retired as Managing Director on 30.09.2009 and appointed as Additional Director,designated as Vice Chairman w.e.f. 01.10.2009

Name Category No. ofBoard

Meetings

attended

during

2009-10

Whether

attended

AGM

held on

27th

August,

2009

No. of

Directorships

in other

publiccompanies

ason31.03.2010*

No.of

Committee

positions held in

otherpublic

companies

as on

Chairman Member Chairman MemberMr.Subodh Bhargava

Mr.Jacobus Schraven

Dr.Anthony Hayward

(Resigned

w.e.f. 18.09.2009)

Mr. Andrew Robb

Mr.Philippe Varin

(Resigned

w.e.f.27.05.2009)

Mr.KirbyAdams

(Appointed w.e.f. 09.04.2009)

Mr. H. M. Nerurkar

(Appointed ExecutiveDirector w.e.f. 09.04.2009to 30.09.2009 &

Managing Director

w.e.f.01.10.2009)

Independent

Non-Executive

-do-

-do-

-do-

Not Independent

Non-Executive

-do-

Not Independent

Executive

9

8

0

9

1

9

9

Yes

Yes

No

Yes

N.A.

Yes

Yes

3

N.A.

N.A.

2

8

N.A.

N.A.

3

N.A.

N.A.

5

N.A

.

N.A

.


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Nine Board Meetings were held during the year 2009-10 and the gap between two meetings didnot exceed fourmonths.The dates on which the Board Meetings were held were as follows :

9th April, 2009, 25th June, 2009, 29th July, 2009, 27th August, 2009, 30thSeptember, 2009, 27th October, 2009,26th November, 2009, 28th January, 2010 and16thFebruary, 2010.

Dates for the Board Meetings in the ensuing year are decided well in advance andcommunicated to theDirectors.

Board Meetings are held at the Registered Office of the Company.The Agenda along with

theexplanatory notes are sent in advance to the Directors. Additional meetings of the

Board are held when deemed necessary by the Board.The information as required under

Annexure IA to Clause 49 is being made available to the Board.

Audit Committee

The Company had constituted an Audit Committee in the year 1986. The scope of the activities of

the Audit Committee is as set out in Clause 49 of the Listing Agreements with the Stock

Exchanges read with Section 292A of the Companies Act, 1956. The terms of reference of the

Audit Committee are broadly as follows:

A> To review compliance with internal control system.

B > To review the findings of the internal auditor relating to various functions of the company.

C> Tohold periodic discussions with the Statutory Auditors and Internal Auditors of theCompany concerning the accounts of the Company, internal control systems, scope of audit andobservations of the Auditors/Internal Auditors.

D> To review the quarterly, half-yearly and annual financial results of the Company beforesubmission to the Board.

E> To make recommendations to the Board on any matter relating to the financial managementoftheCompany,includingStatutory & Internal Audit Reports.

F> Recommending the appointment of statutory auditors and branch auditors and fixation oftheirremuneration.

Mr. Subodh Bhargava, Chairman of the Audit Committee was present at the AnnualGeneral Meeting held on27th August, 2009.


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The composition of the Audit Committee and the details of meetings

attended by the Directors are given below :

Audit Committee meetings are attended by the Group Chief Financial Officer, Chief (Corporate

Audit) and Chief Financial Controller (Corporate) and Representatives of Statutory Auditors.The Company Secretary acts as the Secretary of the Audit Committee.

Eight Audit Committee Meetings were held during 2009-10. The dates on which the said

meetings were held were as follows :

7th April, 2009, 24th June, 2009, 29th July, 2009, 26th August, 2009, 27th October, 2009, 25thNovember, 2009, 28thJanuary, 2010 and 16th February, 2010..

THE NECESSARY QUORUM WAS PRESENT AT THE MEETING.

Whistle Blower Policy

The Audit Committee at its meeting held on 25th Oct

ober, 2005, approved framing of aWhistle Blower Policy that provides a formal mechanism for all employees of the Company toapproach the EthicsCounsellor/Chairman of the Audit Committee of the Company and makeprotective disclosures about the unethical behaviour, actual or suspected fraud or violation ofthe Companys Code of Conduct. The Whistle Blower Policy is an extension of the Tata Code ofConduct, which requires every employee to promptly report to the Management any actual orpossible violation of the Code or an event he becomes aware of that could affectthe business orreputation of the Company.The disclosures reported are addressed in the manner and withinthe time frames prescribed in the Policy. Under the Policy, each employee of the Company hasan assured access to the Ethics Counsellor/Chairman of the Audit Committee.

Remuneration CommitteeThe Company had constituted a Remuneration Committee in the year 1993. The broad terms ofreference oftheRemunerationCommittee are as follows :

Review the performances of the Managing Director and the Whole-Time Directors, afterconsidering the Companys performance.

Recommended to the board remuneration including salary, perquisites and commission to bepaid to the Managing Director and the Whole-Time Directors of the company.

Finalise the perquisites package of the Managing Director and the Whole-Time Directorswithin the overall ceiling fixed by the board.

Recommend to the Board, retirement benefits to be paid to the Managing Director and theWhole-Time Directors under the Retirement Benefit Guidelines adopted by the Board.

Names ofMembers Category No. of Meetings attended during

the year2009-10

Mr.SubodhBhargava,Chairman

Mr. S. M. Palia, Member

Mr.Ishaat Hussain

Member, Chartered Accountant

Mr.Andrew Robb,Member

Independent,Non-Executive

-do-

Not Independent,Non-Executive


8

8

8

8


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The composition of the Remuneration Committee and the details of meetings attendedbythe Directors are given below :

Names ofMembers Category

No. of Meetings attended

during the year2009-

10

Mr.Suresh Krishna, Chairman

Mr. R.N.Tata,Member

Mr. S. M. Palia, Member


Not Independent, Non-

Executive Independent,Non-

Executive

2

3

3

Three meetings of the Remuneration Committee were held during 2009-10. The

dates on which the saidmeetings were held were as follows :

9th APRIL, 2009; 25th JUNE, 2009; 30th SEPTEMBER, 2009.

The Chairman of the Remuneration Committee, Mr. Suresh Krishna was present at theAnnual General Meeting held on 27th AUGUST, 2009.

The Company has complied with the non-mandatory requirement of Clause 49regarding the RemunerationCommittee.

Details Of Remuneration For 2009-2010

Non-Whole-time Directors (Rs. lakhs)

Name of the Director Sitting Fees

1. Mr. R.N.Tata2. Mr. B. Muthuraman

3. Mr. James Leng

4. Mr. Nusli N. Wadia

5. Mr. S. M. Palia

6. Mr. Suresh Krishna

7. Mr. Ishaat Hussain

8. Dr. J. J. Irani

9. Mr. Jacobus Schraven

10. Mr.Subodh Bhargava11. Dr.Anthony Hayward

12. Mr.Andrew Robb

13. Mr.KirbyAdams

14. Mr.Philippe Varin

Total

3.401.80 @@

0.20

2.60

6.20 #

1.50

5.50 #

3.20 @

2.20

3.400.00

4.20

3.40

0.40

38.00


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of

Shares

Irani

Subodh

Jacobus

Robb

Adams

Nerurk

(Managing Director)

7,406

1,012

Nil

Nil

Nil

# Includes amount of Rs. 60,000/- paid in 2010-11.

@ Excluding retirementbenefits of Rs.36.28 lakhs paid to Dr. J. J. Irani.

@@ Excluding retirementbenefits of Rs. 318.93 lakhs paid to Mr. B. Muthuraman.

Based on the recommendation of the Remuneration Committee, the Boarddecided that no commission be paid to theNon-Executive Directors of theCompany for the financial year ended 31st March, 2010.

Managing and Whole-time DirectorsName Salary

Rs.Lakhs

Perquisites

&

Allowances

Rs. lakhs

Commission@

Rs.

Stock

Option

Mr. B. Muthuraman

Managing Director upto 30.09.2009

Mr. H. M. Nerurkar

Executive Directorw.e.f. 09.04.2009 to 30.09.2009

Managing Directorw.e.f. 01.10.2009

63.37

71.03

37.45

30.24

300

200

Nil

Nil

@ Payable in 2010-11.

Shareholding Of The Directors In The Company As On 31st

March,

2010.

Total Shareholding of the Directors as on 31st March, 2010 44,590Ordinary Shares.

Ethics And Compliance Committee

In accordance with the Securities and Exchange Board of India (Prohibition of InsiderTrading)Regulations,1992, as amended (the Regulations), the Board of Directors of the Company adoptedthe revised Tata Code ofConduct for Prevention of InsiderTrading and the Code of CorporateDisclosure Practices (the Code) to be followedbyDirectors, Officers and other Employees. TheCode is based on the principle that Directors, Officers and Employees of a Tata Company owe a

Director No. ofOrdinaryShares held

Mr. R.N.Tata (Chairman)

Mr.B.Muthuraman

(Vice Chairman)

Mr. Nusli N. Wadia

Mr. S. M. Palia

Mr.Suresh Krishna

Mr.Ishaat Hussain

24,821

5,490

Nil

3,008

Nil

2,216


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fiduciary duty to, among others, the shareholders of the Company toplace the interest of theshareholders above their own and conduct their personal securities transactions in a mannerthatdoes not create any conflict of interest situation.

One meeting of Ethics And Compliance Committee was held on 16 thFebruary, 2010.

The composition of the committee is given below:

Names of Members Category No. of meetingsattended during

2009-10

Mr. Ishaat Hussain, Chairman

Mr. Suresh Krishna, MemberNot Independent, Non-Executive

Independent, Non-Executive1

1

Disclosures The Board has received disclosures from key managerial personnel relating to

material,financial and commercial transactions where they and/or their relativeshave personal interest. There are no materially significant related party transactionswhich have potential conflict with the interest of the Company at large.

The Company has complied with the requirements of the StockExchanges,SEBIand other statutory authorities on all matters relating to capital markets duringthe last three years.Nopenalties or strictures have been imposed on the Companyby the StockExchanges,SEBI or other statutory authorities relating to theabove.

The Company has adopted a Whistle Blower Policy and has established thenecessary mechanism in line with Clause 7 of the Annexure 1D to Clause 49 of the

Listing Agreement with the Stock Exchanges, foremployees to report concernsabout unethical behaviour. No personnel has been denied access to the EthicsCounsellor/Chairman of the Audit Committee..


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Certificate

To the members of

TATA STEEL LIMITED

We have examined the compliance of conditions of Corporate Governance by Tata Steel Limited,for the year ended on 31st March,2010, as stipulated in Clause 49 of the Listing Agreement ofthe said Company with stock exchanges.

The compliance of conditions of Corporate Governance is the responsibility of the management.

Our examination has been limited to a review of the procedures and implementations thereof

adopted by the Company forensuring compliance with the conditions of Corporate Governance

as stipulated in the said Clause. It is neither an audit noran expression of opinion on the financial

statements of the Company.

In our opinion and to the best of our information and according to the explanations given to usand the representations made by the Directors and the management, we certify that the

Company has complied with the conditions ofCorporate Governance as stipulated in Clause 49 of

the above mentioned Listing Agreement.

We further state that such compliance is neither an assurance as to the future viability of the

Company nor oftheefficiency or effectiveness with which the management has conducted the

affairs of the Company.

For DELOITTE HASKINS AND SELLS

Chartered Accountants

Registration Number: 117366W

P.R. Ramesh

Partner Membership No:

70928

Mumbai, 26th May, 2010.


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A CASE STUDY ON:

Satyam ComputersThe Golden Peacock Winner Committing

The Biggest Fraud In Indian History.

The name of the company in Sanskrit is word for truth. Outsourcing I.T. has been thehottest business in this hottest emerging market. Indian companies have been climbing theranks of world leadership ever since the spread of high-speed telecommunications lines toBangalore, Chennai and Mumbai made the country the favored destination.

Satyam was not the first in the business, and it certainly was not the biggest. But it was afast challenger, winning business that its bigger rivals would have embraced. Its sharestraded in Mumbai, but it had grander ambitions.

In the year ending 31st March, 2008 it had acquired four companies, in Belgium, the US andthe UK. Its revenues had pushed past $2 billion, and more than 20 per cent of that fellthrough to pretax profits.

Its motto A Commitment To Value Creation. It seemed like a fairy tale, too good to betrue.

Golden Peacock Winner

Satyam was, if not a paragon of good corporate governance, a pretty good example forlisted companies with a dominant shareholder.

It had just won Golden Peacock, an annual prize awarded by the World Council OnCorporate Governance for quality in risk management and compliance.

The DealOn 16th December B. Ramalinga Raju, the major shareholder, founder and chairman, triedto push through two more acquisitions-this time of companies controlled by his family,where his sons led the management. It was a swaggering move: $ 1.6 billion- almost all thecurrent assets on Satyams books- for 51% (per cent) of Maytas Infrastructure and all ofMaytas Properties.

The latter was an unlisted company for which the only public information available was thesize of its property holding. Maytas, of course, is Satyam, spelled backwards.

The World Bank

Just before taking its Christmas break, the World Bank Group in Washington struck Satyamoff its register of suppliers for eight years.

Satyam urged the World Bank to withdraw its comments about the decisions.

The Resignations

On 25th December, 2008, Dr. Mangalam Srinivasan, who had chaired the compensationcommittee, resigned from the board, ending a 17- year relationship. On 29 th December threemore independent directors resigned. M. Rammohan Rao, who had chaired thecontroversial 16th December board meetings where the Maytas acquisition was announced,


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joined Krishne Palepu and Vinod K. Dham in leaving the company.

The Sell-Offs

Outside the investors were getting a bit nervous, as expected. The share price was evenweaker than the prevailing poor market sentiments present at that time.

But one day, the selling pressure became intense as a very large block of shares hit themarket. Perhaps some of the founders stake had changed hands as collateral for loans.

The lender may have put it up for sale to cover the loans. The game was up.

Another, Bigger Resignation

On 7th January, B. Ramalinga Raju, chairman and promoter of the company, as Indianusage has it, announced that he was stepping down. It seemed there was a hole of $ 1 billionin the accounts. The reported 20+ per cent return on sales had really been only 3 per cent.Was the failed deal to buy the other Raju-controlled companies a last-ditch effort to plugthe whole? Or was it instead to drain the remaining cash out of Satyam and into the familys

bank accounts?

And Where Was The Corporate Governance???

The dust was still settling. The board had been reconstituted and urgent meetings had beenunderway to keep it afloat. A global recession did not help, of course, but Satyam wouldhave been in trouble under any circumstances. This company had followed all the codes,indeed it exceeded governance standards as mandated in India, even sought to emulatestandards in the UK and to meet the New York Stock Exchange guidelines. TheShareholder Grievance Committee designed to anticipate concerns over related partydealings had by then seemed a bad joke.

Postscript

PWCs global CEO Samuel DiPiazza skipped the World Economic Forums shinding inDavos, Switzerland, at the end of January 2009. He was in India, dealing with the arrest oftwo PwC partners involved in the Satyam audit. KPMG and Deloitte had taken over theaudit duties.

A majority shareholding in Satyam was acquired by another Indian technology andconsulting firm, Tech Mahindra. The rebranded Mahindra Satyam retained a listing on theNew York Stock Exchange.

The World Council on Corporate Governance stripped Satyam of its Golden Peacock.

The Conclusion Of The Satyam Scam

Satyam Computers services limited was a consulting and an Information Technology (IT)

services company founded by Mr. Ramalingam Raju in 1988. It was Indias fourth largest

company in Indias IT industry, offering a variety of IT services to many types of busine sses

Its networks spanned from 46 countries, across 6 continents and employing over 20,000 IT

professionals. On 7th

January 2009, Satyam scandal was publicly announced & Mr.

Ramalingam confessed and notified SEBI of having falsified the account.


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Raju confessed that Satyams balance sheet of 30 September 2008 contained

Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as against Rs

5,361 crores (US$ 1.1 billion) reflected in the books]. An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.

An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds which

were arranged by himself.

An overstated debtors position of Rs. 490 crores (US$ 100.94 million) [as against Rs. 2,651

crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his companys revenues

contained the following statements:

What started as a marginal gap between actual operating profit and the one reflected in the

books of accounts continued to grow over the years. It has attained unmanageable proportions

as the size of company operations grew significantly [annualised revenue run rate of Rs 11,276

crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of Rs 8,392

crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the concern was

that poor performance would result in a takeover, thereby exposing the gap. The aborted

Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was

like riding a tiger, not knowing how to get off without being eaten.

the project report_new. (2)

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