Professional Documents
Culture Documents
SUBMITTED TO
UNIVERSITY OF MUMBAI IN THE PARTIAL FULLFILMENT OF B.B.I. DEGREE
BY
Uzma Mansuri T.Y.BCOM (B&I) (A-10) SEAT NO: 939
STUDYING AT
RIZVI EDUCATION SOCIETYS RIZVI COLLEGE OF ARTS, SCIENCE & COMMERCE BANDRA (W), MUMBAI-50
ACADEMIC YEAR
(2009-2010)
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DECLARATION
I, Miss Uzma Mansuri, a student of T.Y.B.Com (Banking & Insurance)-SEM: 5 of Rizvi College of Arts, Science and Commerce hereby declare that I have completed this project titled Corporate Governance in Private Sector Banks for the academic year 2009-2010. It is an original and true work to the best of my knowledge
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CERTIFICATE
I, Prof. Furquan shaikh, hereby verify that Miss Uzma Mansuri have completed this project titled Corporate Governance in Private Sector Banks for the academic year 2009-2010. It is an original and true work to the best of my knowledge.
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ACKNOWLEDGEMENT
The work with this dissertation has been extensive and trying, but in the first place exciting, instructive, and fun. Without help, support, and encouragement from several persons, I would never have been able to finish this work. First of all, I would like to thank my project guide Mr. Furquan shaikh, who not only served as my supervisor but also encouraged and challenged me throughout my academic program. He patiently guided me through the dissertation process, never accepting less than my best efforts.
I also extend my sincere thanks to our Principal Dr S.G.A.Zaidi and vice Principal
Beena Pant for supporting me and also the other students in an indirect manner.
And lastly, I would like to thank almighty and my Parents for encouraging and also for providing the funds for the successful completion of my project and insights on the workings of academic research in general.
Executive Summary
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Banks earlier performed two main activities of accepting deposits and lending. But this scenario of accepting deposits and lending has completely changed. Today banks carry on n number of activities. As the banking business is widening, the responsibility of banks and investors expectations from banks has also considerably increased. This project talks of Corporate governance not only being a pre-requisite for facing intense competition for substantial growth but it also includes the parameters of fairness, accountability, disclosures and transparency and to maximize value for the stakeholders. Corporate governance extends far beyond the boundary of corporate laws. Today the focus on governance is on the quality of governance. Even capital and investments from the international investors are available to corporate by demonstrating good governance practices. The project not only gives us insight about corporate governance but it also covers the issues to be taken care of banks. The focus of corporate governance is more in the financial sector in general and banking particularly. Governance issues are of paramount importance, as banks are the critical elements of an economy playing a major role channelizing the public savings into productive activities. Banking is considered as a subset of corporate governance as activities of banks are stringently regulated by the regulatory authority.
SR.NO 1 TABLE OF CONTENT PAGE.NO 6 Page | 6
GOVERNANCE 2 3 4 5 6 7 8 CORPORATE GOVERNANCE IN INDIA A BACKGROUND GUIDELINES AND CODES OF CORPORATE GOVERNANCE CONCEPT OF CORPORATE GOVERNANCE DEFINITION OF CORPORATE GOVERNANCE ORIGIN OF CORPORATE GOVERNANCE ORIGIN IN INDIA OF CORPORATE GOVERNANCE CORPORATE GOVERNANCE IN LISTED COMPANIES CLAUSE 49 OF THE LISTING AGREEMENT CORPORATE GOVERNANCE IN BANKS OBJECTIVES OF CORPORATE GOVERNANCE IN BANKS CORPORATE GOVERNANCE IN PRIVATE SECTOR BANKS CORPORATE GOVERNANCE OF HDFC BANK CONCLUSIONS BIBLIOGRAPHY 8 12 16 19 20 22 24
9 10 11 12 13 14
50 52 53 59 68 69
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Corporate governance basically denotes rule of law, transparency, accountability and protection of public interest in the management of a companys affairs in the prevailing global, competitive and digital environment. It calls for an enlightened investing community and strict regulatory regimes to protect the rights of the investors and companies to improve productivity and profitability without recourse to any means which will offend the moral, ethical and regulatory framework. The framework for corporate governance is not only an important component affecting the long-term prosperity of companies, but it is a leading species of large genus namely, National Governance, Human Governance, Societal Governance, Economic Governance and Political Governance. Government provides necessary conditions, framework and environment to corporate to operate. There is, however, no universal recipe for good corporate governance since business environment varies from country to country. Efforts to articulate standards for corporate governance took roots in countries like the United States and the United Kingdom and have subsequently spread to other countries. The Organization for Economic Cooperation and Development (OECD) took early initiatives to address governance issues and adopted the OECD Principles on Corporate Governance in May 1999. Equity markets in these countries were not too strong but the investment in equities was on the ascendance. After 1990 the transition from central planning to market driven economies, particularly the privatization of state-owned companies, and the need to provide governance rules for the emerging private sector, brought the issue of corporate governance to the Page | 8
centre stage. As a fall out of 1997 economic and financial crisis, Asian countries too became keenly interested in the issue of corporate governance. Globalization of the marketplace has ushered in an era wherein the quality of corporate governance has become a crucial determinant of survival of corporate. The compatibility of corporate governance practices with global standards has also become an important constituent of corporate success. The practice of good corporate governance has, therefore, become a necessary pre-requisite for any corporation to manage effectively in the globalised market. Today the Indian economy has shifted from a controlled one to a market driven one. In this process there have been several enfoldments in order to survive and flourish in the global competitive market by the Indian corporate who need to assimilate these developments. They can aspire to reach their goals with success if they pursue the right means. Good Governance is the means to that end. The objectives before a business are to create wealth for the society, maintain and preserve that wealth efficiently and to share the wealth with the stakeholders. Corporate Governance is the method by which the aforesaid objectives are achieved. Liberalization and Globalization has opened up vast opportunities for domestic players but is also fraught with various challenges. Foreign Institutional Investors too demand greater professionalism in the corporate activities. All these and many other related developments have brought in the issue of Corporate Governance to center stage. Thus Corporate Governance has become imperative for good corporate functioning and success. Corporate Governance which until recently meant little to all but now it has become a mainstream concern and a subject of discussion in corporate boardrooms, academic circles and government and regulators around the globe.
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and thus had little incentive for either proper credit appraisal or effective follow-up and monitoring. Their nominee directors routinely served as rubber-stamps of the management of the day. With their support, promoters of businesses in India could actually enjoy managerial control with very little equity investment of their own. Borrowers therefore routinely recouped their investment in a short period and then had little incentive to either repay the loans or run the business. Frequently they bled the company with impunity, siphoning off funds with the DFI nominee directors mute spectators in their boards. This sordid but increasingly familiar process usually continued till the companys net worth was completely eroded. This stage would come after the company has defaulted on its loan obligations for a while, but this would be the stage where Indias bankruptcy reorganization system driven by the 1985 Sick Industrial Companies Act(SICA) would consider it sick and refer it to the Board for Industrial and Financial Reconstruction (BIFR). As soon as a company is registered with the BIFR it wins immediate protection from the creditors claims for at least four years. Between 1987 and 1992 BIFR took well over two years on an average to reach a decision, after which period the delay has roughly doubled. Very few companies have emerged successfully from the BIFR and even for those that needed to be liquidated, the legal process takes over 10 years on average, by which time the assets of the company are practically worthless. Protection of creditors rights has therefore existed only on paper in India. Given this situation, it is hardly surprising that banks, flush with depositors funds routinely decide to lend only to blue chip companies and park their funds in government securities. Financial disclosure norms in India have traditionally been superior to most Asian countries though fell short of those in the USA and other advanced countries. Noncompliance with disclosure norms and even the failure of auditors reports to conform to the law attract nominal fines with hardly any punitive action. The Institute of Chartered Accountants in India has not been known to take action against erring auditors. While the Companies Act provides clear instructions for maintaining and updating share registers, in reality minority shareholders have often suffered from irregularities in share transfers and registrations deliberate or unintentional. Sometimes non-voting preferential shares have been used by promoters to channel funds and deprive minority shareholders of their dues. Minority shareholders have sometimes been defrauded by the management undertaking Page | 11
clandestine side deals with the acquirers in the relatively scarce event of corporate takeovers and mergers. Boards of directors have been largely ineffective in India in monitoring the actions of management. They are routinely packed with friends and allies of the promoters and managers, in flagrant violation of the spirit of corporate law. The nominee directors from the DFIs, who could and should have played a particularly important role, have usually been incompetent or unwilling to step up to the act. Consequently, the boards of directors have largely functioned as rubber stamps of the management. For most of the post-Independence era the Indian equity markets were not liquid or sophisticated enough to exert effective control over the companies. Listing requirements of exchanges enforced some transparency, but non-compliance was neither rare nor acted upon. All in all therefore, minority shareholders and creditors in India remained effectively unprotected in spite of a plethora of laws in the books. The years since liberalization have witnessed wide-ranging changes in both laws and regulations driving corporate governance as well as general consciousness about it. Perhaps the single most important development in the field of corporate governance and investor protection in India has been the establishment of the Securities and Exchange Board of India (SEBI) in 1992 and its gradual empowerment since then. Established primarily to regulate and monitor stock trading, it has played a crucial role in establishing The basic minimum ground rules of corporate conduct in the country. Concerns about corporate governance in India were, however, largely triggered by a spate of crises in the early 90s the Harshad Mehta stock market scam of 1992 followed by incidents of companies allotting preferential shares to their promoters at deeply discounted prices as well as those of companies simply disappearing with investors money. These concerns about corporate governance stemming from the corporate scandals as well as opening up to the forces of competition and globalization gave rise to several investigations into the ways to fix the corporate governance situation in India. One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the issue of corporate governance the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later.
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These important efforts at improving corporate governance in India. The SEBI committees Recommendations have had the maximum impact on changing the corporate governance Situation in India. The Advisory Group on Corporate Governance of RBIs standing Committee on International Financial Standards and Codes also submitted its own Recommendations in 2001. A comparison of the three sets of recommendations in reveal the progress in the thinking on the subject of corporate governance in India over the years. An outline provided by the CII was given concrete shape in the Birla Committee report of SEBI. SEBI implemented the recommendations of the Birla Committee through the enactment of Clause 49 of the Listing Agreements. They were applied to companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies, on March 31, 2001; to companies with a paid up capital of Rs. 10 crore or with a net worth of Rs. 25 crore at any time in the past five years, as of March 31, 2002; to other listed companies with a paid up capital of over Rs. 3 crore on March 31, 2003. The Narayana Murthy committee worked on further refining the rules. The recommendations also show that much of the thrust in Indian corporate Governance reform has been on the role and composition of the board of directors and the disclosure laws. The Birla Committee, however, paid much-needed attention to the subject of share transfers which is the Achilles heel of shareholders right in India. The frequency of compliance of companies to the different aspects of the corporate governance regulation. Clearly much more needs to be accomplished in the area of compliance. Besides in the area of corporate governance, the spirit of the laws and principles is much more important than the letter. Consequently, developing a positive culture and atmosphere of corporate governance is essential is obtaining the desired goals. Corporate governance norms should not become just another legal item to be checked off by managers at the time of filing regulatory papers
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In the year 1999, the Unit Trust of India (UTI) also formulated a code of corporate governance. This was followed by the professional bodies like the Institute of Company Secretaries of India (ICSI) to focus the attention of the Indian corporate sector, on the norms of governance and it set up a National award of Excellence in Corporate Governance. Birla Committee Report on Corporate Governance SEBI constituted a Committee on corporate governance with as many as 18 members under the chairmanship of Shri Kumar Mangalam Birla, to promote and raise the standards of corporate governance in respect of listed companies on 7thMay 1999. This Committee, after a good deal of deliberations with industrial associations and professional bodies, submitted its report on 25thJanuary 2000, and recommended various new norms of corporate governance. SEBI accepted the recommendations, which culminated in the introduction of clause 49 in the standard Listing Agreement for implementation by all stock exchanges for all listed companies, within a time frame of three years commencing from the financial year 2000-2001. The main recommendations of this Committee related to the composition of the board including independent directors, constitution of audit committee in certain sized companies to look into the financial aspects of a company, remuneration of directors, directors report to include management discussion and analysis report, better disclosure norms to the shareholders through annual report, etc. Regarding the composition of the board of directors of a company, the Committee was of the view that the composition of the board of directors is critical to the independent functioning of the board as it determines the ability of the board to collectively provide the leadership and ensures that no one individual or group is able to dominate the board. The committee recommended that the board of a company should have an optimum combination of executive and non-executive directors, with not less than fifty percent of the board comprising the non-executive directors. As the executive directors are involved in the day-to-day management of companies, the non-executive directors bring external and wider perspective and independence to the decision-making. It has been the practice of most of the companies in India to fill the board with representatives of the promoters of the company as independent directors. This has undergone a change and now the boards comprise of following groups of directors: Promoters directors, Executive directors, nonexecutive directors, and a part of who are independent.
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Based on these recommendations, the Companies (Amendment) Act 2000 introduced many provisions relating to corporate governance including (a) additional ground of disqualification of directors in certain cases, (b) setting up of audit committees, (c) directors responsibility statement in the directors report, (d) introduction of postal ballot for transacting certain items of business in the general meeting, and (e) enforcement of accounting standards. Corporate governance was also introspected by the Advisory Group constituted by the Standing Committee on International Finance Standards and Codes of the Reserve Bank of India under the Chairmanship of Dr. Y.V.Reddy the then Deputy Governor and later on the Governor of RBI.26 All these efforts focused the attention of the corporate boards that they should manage the affairs of companies with better accountability to shareholders and achieve transparency of operations with disclosure of both financial and non-financial data through annual report and other periodical reports. As a result, annual report of listed Indian companies, now reflect in adequate measure the new norms of governance. Naresh Chandra Committee Report on Corporate Audit and Governance (2002) The Enron debacle in July 2002, involving the hand-in-glove relationship between the auditor and the corporate client and various other scams in the United States, and the consequent enactment of the stringent Sarbanes Oxley Act in the United States were some important factors, which led the Indian government to wake up. The Department of Company Affairs in the Ministry of Finance on 21 August 2002, appointed a high level committee, popularly known as the Naresh Chandra Committee, to examine various corporate governance issues and to recommend changes in the diverse areas involving the auditor-client relationships and the role of independent directors. The Committee submitted its Report on 23 December 2002. In its report, the Committee commented on: (a) the poor structure and composition of the board of directors of Indian companies, (b) scant fiduciary responsibility, (c) poor disclosures and transparency, (d) inadequate accounting and auditing standards, (e) the need for experts to go through the minutest details of transactions among companies, banks and financial institutions, capital markets etc. On the auditor company relationship, the Committee recommended that the proprietary of auditors rendering non-audit services is a complex area, which needs to be carefully dealt with. The recommendations of this Committee are more or less in line with the Rules framed Page | 16
by the Securities & Exchange Commission (SEC) in accordance with the provisions of the Sarbanes-Oxley Act 2002. The recommendations of the Naresh Chandra Committee are expected to play a vital role in strengthening the composition and effectiveness of the regulatory framework for good corporate governance. Narayana Murthy Committee Report on corporate governance In the year 2002 SEBI analyzed the statistics of compliance with clause 49 by listed companies and felt that there was a need to look beyond the mere systems and procedures, if corporate governance was to be made effective in protecting the interests of the investors. SEBI, therefore, constituted a committee under the Chairmanship of N.R. Narayana Murthy, Chairman of Infosys Technologies Ltd to review the performance of corporate governance in India and make appropriate recommendations. The Committee included representatives from the stock exchanges, chambers of commerce and industry, investor associations and professional bodies. The Narayana Murthy Committee submitted its report on 8 February 2003. In the meantime many of the recommendations of the Naresh Chandra Committee found their acceptance in the form of the Companies (Amendment) Bill of 2003, which was introduced in the Parliament in May 2003, but now had been withdrawn. The mandatory recommendations of the Committee relate to; (a) the role and functions of the Audit committee, (b) the risk management and minimization procedures, (c) the uses and the application of funds received from the initial public offers, (d) code of conduct for the board, (e) nominee directors and independent directors.
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Principles Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to theorganization Commonly accepted principles of corporate governance include i. Rights and equitable treatment of shareholders: Organizations should respect
the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. ii. Interests of other stakeholders: Organizations should recognize that they have
iii.
Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person. iv. Integrity and ethical behaviors: Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries. v. Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investorshaveaccesstoclear,factualinformation.
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The term corporate governance has come to mean two things The processes by which companies are directed and controlled. A field in economics, which studies the many issues arising from the separation
Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board, regulatory authorities and to a lesser extent employees and the community at large. Systems and processes deal with matters such as delegation of authority. The corporate governance structure specifies the rules and procedures for making decisions on corporate affairs. It also provides the structure through which the company objectives are set, as well as the means of attaining and monitoring the performance of those objectives.
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1.
In Dec 1992 Sir Adrian Cadbury Committee, UK report on Financial Aspects of Corporate Governance and it took the view that governance was not a matter of legislation and the report produced a code of Best Practice, comprising 19 provisions and 14 notes dealing with Board and committee structures, remuneration and financial reporting and describing the appropriate relationship with auditors. This led to London Stock exchange asking the listed companies whether they complied with Cadbury rules or were asked to explain in case of non-compliance.
Alongside, Fat cat corporate scandals, on fixing remuneration, were on the rise. This led to constitution of Greenburg committee on director remuneration in Jan 1995 reporting in July1995.
The Greenburg committee produced its own code in relation to directors remuneration and this code was adopted with the listing rules on a Comply or explain basis.
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Following the recommendations of Cadbury and Greenburg committees, a committee on CG was established of Sir. Ronald Ham bell the then Chairman of ICI.
The final report of Ronald Hampbell came in Jan1998 which is popularly known as Hampbell committee report
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SEBI appointed the Birla Committee to fashion a code of corporate governance. In 2000, SEBI accepted the recommendations of the Birla Committee and introduced Clause 49 into the Listing Agreement of Stock Exchanges. The First code for CG was enacted based on the Kumar Mangalam Birla Committee 1999; guidelines were issued in 2000 report. Companies are also required to furnish statements and reports for the Electronic Data Information Filing and Retrieval (EDIFAR) system maintained by SEBI.
The report has also set out recommendations of Naresh Chandra Committee (2002) on Corporate Audit and governance set up by Department of Company Affairs.
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To further improve the guidelines SEBI constituted a Committee on Corporate Governance (Chairman, N.R. Narayana Murthy) whose report was presented on (08.02.2003.)
SEBI has since incorporated the recommendations of the Murthy Committee, and the latest revisions to Clause 49 became law on January 1, 2006.
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The existing listed companies which are required to comply with revised clause 49
of the Listing Agreement should have a paid up capital of Rs. 3 cores and above or net worth of Rs. 25 corers or more at any time in the history of the company, by April 1, 2005. c. The companies complying with revised Clause 49 of the Listing Agreement have to
submit a quarterly compliance report to the stock exchange as per the sub clause VI (ii) in the revised Clause 49 of the Listing Agreement, within 15 days from the end of every quarter. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company. d. set The Stock Exchanges shall ensure that the provisions of the revised clause are up its Board and constituted committees such as Audit Committee,
complied with, by companies seeking listing for the first time. For this the company had to Shareholders/investors Grievances Committee etc. before seeking approval for listing. e. The Stock exchange should set up a separate monitoring cell to monitor the
compliance with the provisions of the revised Clause 49 on Corporate Governance. The cell, after receiving the quarterly compliance reports from the companies complying with
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the requirements of the revised Clause 49, shall submit a consolidated compliance report to SEBI within 60 days from the end of each quarter.
by SEBI on Clause 49 of the Listing Agreement. Implementation given below: such listing. revised i.e. those having a paid up share capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more at any time in the history of the company, by April 1, 2005 Companies complying Page | 28
with the provisions of the existing Clause 49 at present (issued vide circulars dated 21st February, 2000, 9th March 2000, 12th September 2000, 22nd January, 2001 16th March 2001 and 31st December 2001) shall continue to do so till the revised Clause 49 of the Listing Agreement is complied with or till March 31, 2005,whichever is earlier. The companies which are required to comply with the requirements of the revised Clause 49 shall submit a quarterly compliance report to the stock exchanges as per sub Clause VI (ii), of the revised Clause 49, within 15 days from the end of every quarter. The first such report would be submitted for the quarter ending June 30, 2005. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company. 3) The revised Clause 49 shall apply to all the listed companies, in accordance with the
schedule of implementation given above. However, for other listed entities which are not companies, but body corporate (e.g. private and public sector banks, financial institutions, insurance companies etc.) incorporated under other statutes, the revised Clause 49 will apply to the extent that it does not violate their respective statutes and guidelines or directives issued by the relevant regulatory authorities. The revised Clause 49 is not applicable to Mutual Funds. 4) The Stock Exchanges shall ensure that all provisions of the revised Clause 49 have been complied with by a company seeking listing for the first time, before granting the in-principle approval for such listing. For this purpose, it will be considered satisfactory compliance if such a company has set up its Board and constituted committees such as Audit Committee, Shareholders/ Investors Grievances Committee etc. in accordance with the revised clause before seeking inprinciple approval for listing. 5) The Stock Exchanges shall set up a separate monitoring cell with identified personnel t monitor the compliance with the provisions of the revised Clause 49 on corporate governance. The cell, after receiving the quarterly compliance reports from the companies which are required to comply with the requirements of the revised Clause 49, shall submit a consolidated compliance report to SEBI within 60 days from the end of each quarter. Encl: Annexure I, I A, I B, I C & I Annexure I Page | 29
Clause 49 - Corporate Governance The company agrees to comply with the following provisions: I. Board of Directors (A) Composition of Board i. The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors. ii. Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. iii. For the purpose of the sub-clause (ii), the expression independent director shall mean a apart from receiving directors remuneration, does not have any material non-executive director of the company who: pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director; is not related to promoters or persons occupying management positions at Has not been an executive of the company in the immediately preceding is not a partner or an executive or was not partner or an executive during the the statutory audit firm or the internal audit firm that is associated with the the legal firm(s) and consulting firm(s) that have a material association with is not a material supplier, service provider or customer or a lessor or lessee the board level or at one level below the board; three financial years; preceding three years, of any of the following: company, and the company. of the company, which may affect independence of the director; and
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Explanation
more of the block of voting shares. For the purposes of the sub-clause (iii): a) Associate shall mean a company which is an associate as defined in Accounting Standard (AS) 23, Accounting for Investments in Associates in Consolidated Financial Statements, issued by the Institute of Chartered Accountants of India. b) Senior management shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. c) d) Relative shall mean relative as defined in section 2(41) and section 6 read with Nominee directors appointed by an institution which has invested in or lent to the company Schedule IA of the Companies Act, 1956.. shall be deemed to be independent directors. Explanation: Institution for this purpose means a public financial institution as defined in Section 4A of the Companies Act, 1956 or a corresponding new bank as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both Acts]. (B) Non executive directors compensation and disclosures All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.
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i.
The board shall meet at least four times a year, with a maximum time gap of three months
between any two meetings. The minimum information to be made available to the board is given in Annexure I A. ii. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. Explanation: i. For the purpose of considering the limit of the committees on which a director can serve, all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 25 of the Companies Act shall be excluded. ii. iii. For the purpose of reckoning the limit under this sub-clause, Chairmanship/ membership of The Board shall periodically review compliance reports of all laws applicable to the the Audit Committee and the Shareholders Grievance Committee alone shall be considered. company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances. (D) Code of Conduct i. ii. The Board shall lay down a code of conduct for all Board members and senior management All Board members and senior management personnel shall affirm compliance with th of the company. The code of conduct shall be posted on the website of the company. code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO. Explanation: For this purpose, the term senior management shall mean personnel of the company who are members of its core management team excluding Board of Directors.. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. II Audit Committee Page | 32
(A) Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following: i. ii. The audit committee shall have minimum three directors as members. Two-thirds of the All members of audit committee shall be financially literate and at least one member shall members of audit committee shall be independent directors. have accounting or related financial management expertiseExplanation 1: The term financially literate means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individuals financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. iii. iv. v. The Chairman of the Audit Committee shall be an independent director; The Chairman of the Audit Committee shall be present at Annual General Meeting to The audit committee may invite such of the executives, as it considers appropriate and
answer shareholder queries; particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee; vi. The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present. Page | 33
(C) Powers of Audit Committee The audit committee shall have powers, which should include the following: 1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal or other professional advice. 4. To secure attendance of outsiders with relevant expertise, if it considers necessary. (D) Role of Audit Committee The role of the audit committee shall include the following: i. ii. iii. iv. Oversight of the companys financial reporting process and the disclosure of its financial Recommending to the Board, the appointment, re-appointment and, if required, the Approval of payment to statutory auditors for any other services rendered by the statutory Reviewing, with the management, the annual financial statements before submission to the information to ensure that the financial statement is correct, sufficient and credible. replacement or removal of the statutory auditor and the fixation of audit fees. auditors. board for approval, with particular reference to: Matters required to be included in the Directors Responsibility Statement to be included in the Boards report in terms of clause (2AA) of section 217 of the Companies Act, 1956
findings Compliance with listing and other legal requirements relating to financial Disclosure of any related party transactions Qualifications in the draft audit report. statements Changes, if any, in accounting policies and practices and reasons for the same Major accounting entries involving estimates based on the exercise of judgment Significant adjustments made in the financial statements arising out of audit
by management
v.
Reviewing, with the management, the quarterly financial statements before submission to
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vi. vii.
Reviewing, with the management, performance of statutory and internal auditors adequacy Reviewing the adequacy of internal audit function, if any, including the structure of the
of the internal control systems. internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. viii. ix. Discussion with internal auditors any significant findings and follow up there on. Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. x. xi. xii. xiii. Discussion with statutory auditors before the audit commences, about the nature and scope To look into the reasons for substantial defaults in the payment to the depositors debenture To review the functioning of the Whistle Blower mechanism, in case the same is existing. Carrying out any other function as is mentioned in the terms of reference of the Audit of audit as well as post-audit discussion to ascertain any area of concern. holders, shareholders (in case of nonpayment of declared dividends) and creditors.
Committee. Explanation (i): The term "related party transactions" shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the said audit committee shall have such additional functions / features as is contained in this clause.
(E) Review of information by Audit Committee The Audit Committee shall mandatorily review the following information: i. ii. Management discussion and analysis of financial condition and results of operations; Statement of significant related party transactions (as defined by the audit committee),
iii. iv. v.
Management letters / letters of internal control weaknesses issued by the statutory auditors; Internal audit reports relating to internal control weaknesses; and The appointment, removal and terms of remuneration of the Chief internal auditor shall be
subject to review by the Audit Committee III. Subsidiary Companies i. ii. iii. At least one independent director on the Board of Directors of the holding company shall The Audit Committee of the listed holding company shall also review the financial The minutes of the Board meetings of the unlisted subsidiary company shall be placed at be a director on the Board of Directors of a material non listed Indian subsidiary company. statements, in particular, the investments made by the unlisted subsidiary company. the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company. Explanation 1: The term material non-listed Indian subsidiary shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Explanation 2: The term significant transaction or arrangement shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year. Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned. IV. Disclosures
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(A) Basis of related party transactions i. ii. iii. A statement in summary form of transactions with related parties in the ordinary course of Details of material individual transactions with related parties which are not in the normal Details of material individual transactions with related parties or others, which are not on business shall be placed periodically before the audit committee. course of business shall be placed before the audit committee. an arms length basis should be placed before the audit committee, together with Managements justification for the same.. (B) Disclosure of Accounting Treatment Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the managements explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. (C) Board Disclosures Risk management The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework.
(D) Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement
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shall be certified by the statutory auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. (E) Remuneration of Directors i. ii. All pecuniary relationship or transactions of the non-executive directors vis--vis the Further the following disclosures on the remuneration of directors shall be made in the (a) All elements of remuneration package of individual directors summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc. (b) Details of fixed component and performance linked incentives, along with the performance criteria. (c) Service contracts, notice period, severance fees. (d) Stock option details, if any and whether issued at a discount as well as the period over which accrued and over which exercisable. iii. The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the companys website and reference drawn thereto in the annual report. iv. v. The company shall disclose the number of shares and convertible instruments held by nonNon-executive directors shall be required to disclose their shareholding (both own or held executive directors in the annual report. by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director (F) Management i. As part of the directors report or as an addition thereto, a Management Discussion and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the companys competitive position: i. Industry structure and developments. Page | 38 company shall be disclosed in the Annual Report. section on the corporate governance of the Annual Report:
Opportunities and Threats. Segmentwise or product-wise performance. Out lookv. Risks and concerns. Internal control systems and their adequacy. Discussion on financial performance with respect to operational performance. Material developments in Human Resources / Industrial Relations front, including number (Senior management shall make disclosures to the board relating to all material financial
of people employed. and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) Explanation: For this purpose, the term "senior management" shall mean personnel of the company who are members of its. core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads. (G) Shareholders I. In case of the appointment of a new director or re-appointment of a director the (a) A brief resume of the director; (b) Nature of his expertise in specific functional areas; (c) Names of companies in which the person also holds the directorship and the membership of Committees of the Board; and (d) Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above II. Quarterly results and presentations made by the company to analysts shall be put on companys web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. III. A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as Shareholders/Investors Grievance Committee. Page | 39 shareholders must be provided with the following information:
IV.
To expedite the process of share transfers, the Board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.
V.
CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that: I. (i) (ii) II. They have reviewed financial statements and the cash flow statement for the year and these statements do not contain any materially untrue statement or omit any material fact or these statements together present a true and fair view of the companys affairs and are in There are, to the best of their knowledge and belief, no transactions entered into by the that to the best of their knowledge and belief : contain statements that might be misleadin; compliance with existing accounting standards, applicable laws and regulations. company during the year which are fraudulent, illegal or volatile of the companys code of conduct. III. They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. IV. They have indicated to the auditors and the Audit committee (i) significant changes in internal control during the year; (ii) significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and (iii) instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the companys internal control system Page | 40
(i) There shall be a separate section on Corporate Governance in the Annual Reports of company, with a detailed compliance report on Corporate Governance. Non-compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annexure- I C and list of non-mandatory requirements is given in Annexure I D. (ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given in Annexure I B. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company
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VII. Compliance (1) The company shall obtain a certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company. (2) The non-mandatory requirements given in Annexure I D may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.
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Annexure I A Information to be placed before Board of Directors 1) 2) 3) 4) 5) 6) 7) 8) 9) Annual operating plans and budgets and any updates. Capital budgets and any updates. Quarterly results for the company and its operating divisions or business segments. Minutes of meetings of audit committee and other committees of the board. The information on recruitment and remuneration of senior officers just below the board Show cause, demand, prosecution notices and penalty notices which are materially Fatal or serious accidents, dangerous occurrences, any material effluent or pollution Any material default in financial obligations to and by the company, or substantial Any issue, which involves possible public or product liability claims of substantial nature,
level, including appointment or removal of Chief Financial Officer and the Company Secretary. important problems. nonpayment for goods sold by the company. including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company. 10) 11) 12) Details of any joint venture or collaboration agreement. Transactions that involve substantial payment towards goodwill, brand equity, or Significant labour problems and their proposed solutions. Any significant development in
intellectual property. Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc. 13) Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.
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14) 15)
Quarterly details of foreign exchange exposures and the steps taken by management limit Non-compliance of any regulatory, statutory or listing requirements and shareholder
the risks of adverse exchange rate movement, if material service such as non-payment of dividend, delay in share transfer etc.
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Annex ure IB Format of Quarterly Compliance Report on Corporate Governance Name of the Company: Quarter ending on: Particulars Clause of Listing agreement I. Board of Directors (A)Composition of Board (B)Non-executive Directors compensation & disclosures (C)Other provisions as to Board and Committees (D)Code of Conduct II. Audit Committee (A)Qualified & Independent Audit Committee (B)Meeting of Audit Committee (C)Powers of Audit Committee (D)Role of Audit Committee (E)Review of Information by Audit Committee III. Subsidiary Companies IV. Disclosures (A)Basis of related party transactions (B)Board Disclosures (C)Proceeds from public issues, rights issues,preferential issues etc. (D)Remuneration of Directors (E)Management (F)Shareholders V.CEO/CFO Certification 49 I 49(IA) 49 (IB) 49 (IC) 49(ID) 49 (II) 49 (IIA) 49 (IIB) 49 (IIC) 49 (IID) 49 (IIE) 49 (III) 49 (IV) 49 (IVA) 49 (IVB) 49 (IVC) 49 (IVD) 49 (IVE) 49 (IVF) 49 (V) Page | 45 Compliance Status Yes/No Remarks
49 (VI) 49 (VII)
1) The details under each head shall be provided to incorporate all the information required as per the provisions of the Clause 49 of the Listing Agreement. 2) In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A. For
example, if the Board has been composed in accordance with the Clause 49 I of the Listing Agreement, "Yes" may be indicated. Similarly, in case the company has no related party transactions, the words N.A. may be indicated against 49 (IV A) 3) In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in the "Remarks" column as will be complied with at the AGM. Similarly, in respect of matters which can be complied with only where the situation arises, for example, "Report on Corporate Governance" is to be a part of Annual Report only, the words "will be complied in the next Annual Report" may be indicated
Annexure I C List of Items n the Report on Corporate Governance in the Annual Report of Companies 1. A brief statement on companys philosophy on code of governance. 2. Board of Directors:
a. Composition and category of directors, for example, promoter, executive, nonexecutive, independent non-executive, nominee director, which institution represented as lender or as equity investor.
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b. c.
Attendance of each director at the Board meetings and the last AGM. Number of other Boards or Board Committees in which he/she is a member or Number of Board meetings held, dates on which held.
Chairperson
3. Audit Committee:
Brief description of terms of reference Composition, name of members and Chairperson Meetings and attendance during the year
4. Remuneration Committee:
Brief description of terms of reference Composition, name of members and Chairperson Attendance during the year Remuneration policy Details of remuneration to all the directors, as per format in main report.
5. Shareholders Committee:
Name of non-executive director heading the committee Name and designation of compliance officer Number of shareholders complaints received so far Number not solved to the satisfaction of shareholders Number of pending complaints
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7. Disclosures:
Disclosures on materially significant related party transactions that may have potential Details of non-compliance by the company, penalties, strictures imposed on the company conflict with the interests of company at large. by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years. Whistle Blower policy and affirmation that no personnel has been denied access to the Details of compliance with mandatory requirements and adoption of the non mandatory audit committee. requirements of this clause
8. Means of communication.
Quarterly results Newspapers wherein results normally published Any website, where displayed Whether it also displays official news releases; and The presentations made to institutional investors or to the analysts.
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Annexure I D Non-Mandatory Requirements (1) The Board A non-executive Chairman may be entitled to maintain a Chairmans office at the companys expense and also allowed reimbursement of expenses incurred in performance of his duties. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company. (2) Remuneration Committee
The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the companys policy on specific remuneration packages for executive directors including pension rights and any compensation payment. To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director. All the members of the remuneration committee could be present at the meeting. The Chairman of the remuneration committee could be present at the Annual
General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries. (3) Shareholder Rights A half-yearly declaration of financial performance including summary of the significant events in last six-months, may be sent to each household of shareholders. (4) Audit qualifications Company may move towards a regime of unqualified financial statements. Page | 50
(5) Training of Board Members A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them. (6) Mechanism for evaluating non-executive Board Members The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend continue the terms of appointment of nonexecutive directors. (7) Whistle Blower Policy The company may establish a mechanism for employees to report to the management Concerns about unethical behaviour, actual or suspected fraud or violation of the companys code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Established, the existence of the mechanism may be appropriately communicated within the organization.
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In accordance with Clause 49 of the Listing Agreement with the Stock Exchanges in India (Clause 49) and some of the best practices followed internationally on Corporate Governance, the report containing the details of governance systems and processes at Reliance Industries Limited is as Under: 1. Companys Philosophy on Code of Governance Reliances philosophy on Corporate Governance envisages attainment of the highest levels of transparency, accountability and equity in all facets of its operations, and in all its interactions with its stakeholders, including shareholders, employees, lenders, Government and the society at large. Reliance is committed to achieve and maintain the highest standards of Corporate Governance. Reliance believes that all its actions must serve the underlying goal of enhancing overall shareholder value on a sustained basis. Reliance is committed to the best governance practices that create long term sustainable shareholder value. Keeping in view the Companys size, complexity, global operations and corporate traditions, the Reliance Governance framework is based on the following main principles: Constitution of a Board of Directors of appropriate composition, size, varied expertise and commitment to discharge its responsibilities and duties. Ensuring timely flow of information to the Board and its Committees to enable them to discharge their functions effectively. Independent verification and safeguarding integrity of the Companys financial reporting A sound system of risk management and internal control. Timely and balanced disclosure of all material information concerning the Company to all stakeholders Transparency and accountability. Compliance with all the applicable rules and regulations Fair and equitable treatment of all its stakeholders including employees, customers, shareholders and investors
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Banks play a very vital role in the economy of any country and the strengthening and stability of the banking system is a matter general public interest and concern for providing a payment and settlement system. However, today Banking has become complex and it has been recognized that there is need to attach importance to qualitative standards such as internal controls and risk management, composition and role of the board and disclosure standards. In India therefore during the last few years, banks have initiated several steps towards Corporate Governance. Also there is an increasing interest in Corporate Governance in banks due to certain developments such as participation of the public shareholders in the public sector banks, also the entry of new private banks and the need to access capital markets by all banks. The generally accepted principles of Corporate Governance are similar and are applicable to banks also. The key components of Corporate Governance are accountability, transparency, predictability and participation. The governance approaches however differ from one banking institution to another. But the fundamental element remains the same, which includes active concern with understanding the responsibility and diligently discharging them in a prudent manner. The focus on Corporate Governance is particularly acute in financial services and most of all in the banking sector. Governance in banks is considerably much more complex issue than in other sectors. Banks exhibit strong linkages with the real sector of the economy and they are a major source of funding for all types of economic activities. Banks channelize the public saving to the Page | 53
corporate world and other individuals for productive purposes. This important fact makes it clear that banks and financial institution are the backbone of the economy and an important element for the growth of the economy. With this kind of importance of banks and financial institutions, they are under regulatory purview of the Central Bank of the country not only in India but all the countries. The fact remains that banks are highly leveraged entities and also that their failure would have a contagion effect on the entire financial system. Banking is however a very special sub-set of corporate governance with much of its management obligations enshrined in law or regulatory codes and so banks will attempt to comply with the same codes of board governance as other companies. Governance is two-sided issue for banks because they fund their money and also have ownership in other companies. This makes them a significant owner in their own right. There is a lot of focus on raising the level of corporate governance in India mainly from the angle of creating shareholder value and also bringing more transparency in the operations.. The banks have to bring improvement in these standards so as to meet the competitive challenges and the risk associated with the rapidly changing environment.
1.
Corporate governance is very integral to the existence of a bank. It not only inspires
and strengthens the investors confidence but also helps the company to seek higher growth and profits. Corporate Governance seeks to achieve following objectives: 2. A properly structured board with appropriate composition and size, capable of
taking independent and objective decisions and also which can adequately discharge its duties and responsibilities. 3. The balanced board as regards to the adequate representation of the non-executive
and independent directors who will take care of the interests and well-being of all the stakeholders and also of investors. 4. The board shall seek to adopt transparent practices and procedures and should
arrive at true and fair decisions and should carry out independent functions. 5. There should be timely and accurate disclosure on all matters concerning operations
and performance of the bank. 6. The board should keep the shareholders informed of relevant developments
impacting the company. 7. The bank should take adequate risk management and internal control measures.
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Banks are special entities as they not only accept and deploy large amounts of uncollateralized public funds in fiduciary capacity, but also they leverage such funds though credit creation. They are important for smooth functioning of the payment system. In view of the above, legal prescriptions for ownership and governance of banks laid down in the Banking Regulation Act, 1949 which have been supplemented by regulatory prescriptions issued by RBI from time to time. The existing legal framework and significant current practices in particular cover the following aspects: 1. The composition of the board of directors should comprise of members with professional knowledge and their experience in specific sectors like agriculture, rural economy, law etc. The responsibility of the directors should be well defined. There should be training conducted for the directors in this regard. These guidelines on the matters of appointment of directors, their roles and obligations were issued by the Reserve Bank of India. 2. The CEO, being the Director should also satisfy the requirements of the fit and
proper criteria applicable for directors. The CEO should be appointed after seeking the approval from the Reserve Bank of India by providing all the information that may be Page | 56
required while making the application to Reserve bank. These provisions are governed by various sections in the Banking Regulation Act, 1949. 3. Practices followed by the Reserve Bank of India for nominating the directors on the
boards of private sector banks has now changed to nominate directors only in selected private banks. 4. It is necessary to lay down a comprehensive framework relating to the ownership
and governance in the Indian private sector banks in a transparent manner. The framework of policy relating to ownership and governance of private sector banks should ensure that
i.
The ownership and control of private sector banks is well diversified which
The shareholders having 5 percent and above shareholding in the company are
called as Important Shareholders. These important shareholders are fit and proper when their acknowledgement is given for allotment and transfer of shares.
iii.
The private sector banks should have minimum capital of Rs.200crore initially and
300crore within three years. In short it should have adequate capital to meet its expenses and carry out its operations smoothly and maintain a systematic stability. If the above mentioned capital reduces then bank should restore it within a reasonable time.
iv.
Also the bank directors and the CEO who manage the affairs of the bank should
practice sound corporate governance principles. And lastly, the policy and processes which these banks adopt should be transparent and fair.
Issues which need to be taken Care of by Banks These are the Ten Commandments for ensuring bank corporate Governance: 1. Banks shall realize the times are changing: The issue of corporate governance had not been given the requisite attention in the past until the advent of some economic and financial crises in the late 90s. Times are changing now, and today even the smallest of banks need to focus on corporate governance restructuring Page | 57
2.
Banks shall establish an effective capable and reliable board of directors: Banks
should see to it that the board of director of the bank is capable, effective and reliable enough. His implies that the bank board of directors should be truly outside independent directors. The board must be effective and should meet even in the absence of CEO in the meeting. The board should set up a long term strategy, polices and values for the organization 3. Banks shall establish a corporate code of ethics for themselves: Corporate ethics and values should be established by the bank and should govern the operations of the company both from a long term and short term view. 4. Banks shall consider establishing an officer of the Chairman of the Board: Many
banks are already examining this idea of establishing an officer of the chairman of the Board. Such an officer will be made to report to the board and will act as the boards eyes and ears on a daily basis in connection with the functions of the banks. 5. Banks shall have effective and operating audit committee, compensation committee
and nominating/corporate governance committee: The audit committee, compensation committee and nominating committee should be composed of all independent, outside directors of the bank who operate independently. This independence of committees will ensure that there is no bias in the internal audit committees decisions. The corporate governance committee should also bear the responsibility of evaluating the board members.
6.
compensation should be paid to the directors. The remuneration should be commensurate with the risks they take. The bank should aim to appoint a highly qualified director and take appropriate measures to retain them with organization as it normally does with other employees.
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7.
financial services industry is now facing a number of -challenges. This is mainly because of technology innovations and competition. Therefore, it becomes imperative for banks to educate their directors to meet the growing needs of the industry. Continuing education should be given equal importance along with other parameters. 8. Banks shall establish procedures for board succession: The presence of qualified
members on the board is very crucial issue. So a bank should have clearly specified regarding issues of succession to the board. 9. Banks shall disclose, disclose and disclose information: Today it is very necessary
for banks to make disclosures. They will find that the disclosure will burdensome than it was in past. This may be through quarterly letters to the shareholders or other types of communication. 10. Banks shall recognize that the duty is to establish corporate governance procedures
that will serve to enhance shareholder value: The primary objective of the board of directors is to maximize the shareholders wealth. The strategy adopted to achieve this objective should now encompass corporate governance procedures and should be designed with long-term value for the shareholders in focus are designed with long-term value for the shareholders in focus Basel Committee The Basel Committee on Banking Supervision is a committee, of banking supervisory authorities, established by the Central Bank Governors of the G10 developed countries in 1975. The committee in 1988 introduced the Concept of Capital Adequacy Framework, known as Basel Capital Accord, with a minimum capital adequacy of 8 percent. This accord has been gradually adopted not only in member countries but also in more than one hundred other countries, including India. Basel II: The New Basel Capital Accord
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The committee issued a consultative document titled the New Basel Capital Accord, in April 2003, to replace the 1988 Accord, which re-enforces the need for capital adequacy requirements under the current conditions. This accord is commonly known as Basel II and is currently under finalization. Basel II will be applied on a consolidated basis to internationally active banks. However, supervisors are required to test that individual banks are adequately capitalized on a stand-alone basis also. Basel II is based on three Pillars. Pillar 1 Minimum Capital Requirements. Pillar 2 Supervisory Review Process. Pillar 3 Market Discipline.
Pillar 1 discusses the calculation of the total minimum capital requirements for credit, market and operational risks and maintains the level of minimum capital adequacy of 8 percent. Pillar 2 talks about the key principles of supervisory review, risk management guidance and supervisory transparency and accountability with respect to banking risk. Pillar 3 complements Pillar 1 and 2 by encouraging market discipline through enhanced disclosures by banks to enable market participants assess the capital adequacy of banks. The Basel Committee has issued, in August 1999, a guidance paper titled Enhancing Corporate Governance for Banking Organizations to all supervisory authorities throughout the world in order to help them in promoting the acceptance of sound corporate governance by banks in their countries. The Basel Committee Recommendations The Basel Committee published a paper for banking organizations in September 1999. The Committee suggested that it is the responsibility of the banking supervisors to ensure that there is effective corporate governance in the banking industry. It also highlighted the need for having appropriate accountability and checks and balances within each bank to ensure sound corporate governance, which in turn would lead to effective and more meaningful supervision.
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Efforts were taken for several years to remedy the deficiencies of Basel I norm and Basel committee came out with modified approach in June 2004. The final version of the Accord titled International Convergence of Capital Measurement and Capital Standards-A- Revised Framework" was released by BIS. This is popularly known as New Basel Accord of simply Basel ll. Base ll seeks to rectify most of the defects of Basel l Accord. The objectives of Basel ll are the following 1. To promote adequate capitalization of banks. 2. To ensure better risk management and 3. To strengthen the stability of banking system.
Essentials of Accord of Basel ll Capital Adequacy: Basel ll intends to replace the existing approach by a system that would use external credit assessments for determining risk weights. It is intended that such an approach will also apply either directly or indirectly and in varying degrees to the risk weighting of exposure of banks to corporate and securities firms. The result will be reduced risk weights for high quality corporate credits and introduction of more than 100% risk weight for low quality exposures. Risk Based Supervision This ensures that a bank's capital position is consistent with overall risk profile and strategy thus encouraging early supervisory intervention. The new framework lays accent on bank managements developing internal assessment processes and setting targets for capital that are commensurate with bank' particular risk profile and control environment. This internal assessment then would be subjected to supervisory review and intervention by RBI.
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Market Disclosures The strategy of market disclosure will encourage high disclosure standards and enhance the role of market participants in encouraging banks to hold and maintain adequate capital.
HDFC Bank recognizes the importance of good corporate governance, Which is generally accepted as a key factor in attaining fairness for all stakeholders and achieving organizational efficiency? This Corporate Governance Policy, therefore, is established to provide a direction and framework for managing and monitoring the bank in accordance with the principles of good corporate governance Code of Corporate Governance The Bank believes in adopting and adhering to best recognised corporate governance practices and continuously benchmarking itself against each such practice. The Bank understands and respects its fiduciary role and responsibility to shareholders and strives hard to meet their expectations. The Bank believes that best board practices, transparent disclosures and shareholder empowerment are necessary for creating shareholder value. The Bank has infused the philosophy of corporate governance into all its activities. The philosophy on Page | 62
corporate governance is an important tool for shareholder protection and maximisation of their long term values. The cardinal principles such as independence, accountability, responsibility, transparency, fair and timely disclosures, credibility etc. serve as the means for implementing the philosophy of corporate governance in letter and spirit. CompositionoftheBoard The Composition of the Board of Directors of the Bank is governed by the Companies Act, 1956, the Banking Regulation Act, 1949 and the listing requirements of the Indian Stock Exchanges where securities issued by the Bank are listed. The Board has strength of 12 Directors as on March 31, 2008. All Directors other than Mr. Aditya Puri, Mr. Harish Engineer and Mr. Paresh Sukthankar are nonexecutive directors. The Bank has five independent directors and six non-independent directors. The Board consists of eminent persons with considerable professional expertise and experience in banking, finance, agriculture, small scale industries and other related fields. None of the Directors on the Board is a member of more than 10 Committees and Chairman of more than 5 Committees across all the companies in which he/she is a Director. All the Directors have made necessary disclosures regarding Committee positions occupied by them in other companies. Mr. Jagdish Capoor, Mr. Keki Mistry, Mrs. Renu Karnad, Mr. Aditya Puri, Mr. Harish
Engineer and Mr. Paresh Sukthankar are non-independent Directors on the Board. Mr. Arvind Pande, Mr. Ashim Samanta, Mr. Gautam Divan, Mr. C. M. Vasudev and Dr.
Pandit Palande are independent directors on the Board. Bank. The Bank has not entered into any materially significant transactions during the year, Mr. Keki Mistry and Mrs. Renu Karnad represent HDFC Limited on the Board of the
which could have a potential conflict of interest between the Bank and its promoters, directors, management and/or their relatives, etc. other than the transactions entered into in the normal course of business. The Senior Management have made disclosures to the Board confirming that there are no material, financial and/or commercial transactions between them and the Bank which Page | 63
could have potential conflict of interest with the Bank at large. BoardCommittees The Board has constituted committees of Directors to take informed decisions in the best interest of the Bank. These committees monitor the activities falling within their terms of reference. Various committees of the Board were reconstituted during the year due to induction of additional Director namely; Mr. Pandit Palande.
The Board's Committees are as follows: Audit and Compliance Committee Compensation Committee Investors' Grievance (SHARE) Committee Risk Monitoring Committee Credit Approval Committee The Premises Committee Nomination Committee Fraud Monitoring Committee Customer Service Committee
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i.
The Audit and Compliance Committee of the Bank is chaired by Mr. Arvind Pande. The other members of the Committee are Mr. Ashim Samanta, Mr. C. M. Vasudev, Mr. Gautam Divan and Dr. Pandit Palande. Dr. Pandit Palande was inducted as member of the Committee. All the members of the Committee are independent directors and Mr. Gautam Divan is a financial expert. The Committee met 7 (seven) times during the year.
ii.
Compensation Committee
The Compensation Committee reviews the overall compensation structure and policies of the Bank with a view to attract, retain and motivate employees, consider grant of stock options to employees, reviewing compensation levels of the Bank's employees vis--vis other banks and industry in general. The Bank's compensation policy is to provide a fair and consistent basis for motivating and rewarding employees appropriately according to their job / role size, performance, contribution, skill and competence. Mr. Jagdish Capoor, Mr. Ashim Samanta, Mr. Gautam Divan and Dr. Pandit Palande are the members of the Committee. Dr. Pandit Palande was inducted as member of the Committee. The Committee is chaired by Mr. Jagdish Capoor. All members of the Committee other than Mr. Capoor are independent directors. The Committee met 3 (three) times during the year. iii. Investors' Grievance (SHARE) Committee
The Committee approves and monitors transfer, transmission, splitting and consolidation of shares and bonds and allotment of shares to the employees pursuant to Employees Stock Page | 65
Option Scheme. The Committee also monitors redressal of complaints from shareholders relating to transfer of shares, non-receipt of Annual Report, dividends etc. The Committee consists of Mr. Jagdish Capoor, Mr. Aditya Puri and Mr. Gautam Divan. The Committee is chaired by Mr. Capoor. The Committee met 11 times during the year. The powers to approve share transfers and dematerialization requests have been delegated to executives of the Bank to avoid delays that may arise due to non-availability of the members of the Committee. As on March 31, 2008, 43 instruments of transfer representing 3871 shares were pending and since then the same have been processed. The details of the transfers are reported to the Board of Directors from time to time. During the year, the Bank received 142 complaints from shareholders, which have been attended to. The Committee met 11 (eleven) times during the year. Risk Monitoring Committee The committee has been formed as per the guidelines of Reserve Bank of India on the Asset Liability Management / Risk Management Systems. The Committee develops Bank's credit and market risk policies and procedures, verify adherence to various risk parameters and prudential limits for treasury operations and reviews its risk monitoring system. The committee also ensures that the Bank's credit exposure to any one group or industry does not exceed the internally set limits and that the risk is prudentially diversified. The Committee consists of Mrs. Renu Karnad, Mr. Aditya Puri and Mr. C. M. Vasudev and is chaired by Mrs. Renu Karnad. The Committee met 5 (five) times during the year. iv. Credit Approval Committee
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The Credit Approval Committee approves credit exposures, which are beyond the powers delegated to executives of the Bank. This facilitates quick response to the needs of the customers and speedy disbursement of loans. The Committee consists of Mr. Jagdish Capoor, Mr. Aditya Puri, Mr. Keki Mistry and Mr. Gautam Divan. The Committee is chaired by Mr. Capoor.
The Committee met 2 (two) times during the year. v. The Premises Committee
The Premises Committee approves purchases and leasing of premises for the use of Bank's branches, back offices, ATMs and residence of executives in accordance with the guidelines laid down by the Board. The committee consists of Mr. Aditya Puri, Mr. Ashim Samanta, Mrs. Renu Karnad and Dr. Pandit Palande. Dr. Pandit Palande was inducted as member of the Committee w. The Committee is chaired by Mrs. Renu Karnad. The Committee met 4 (four) times during the year. vi. Nomination Committee
The Bank has constituted a Nomination Committee for recommending the appointment of independent / non-executive directors on the Board of the Bank. The Nomination Committee scrutinizes the nominations for independent / non-executive directors with reference to their qualifications and experience. For identifying fit and proper' persons, the Committee adopts the following criteria to assess competency of the persons nominated: Academic qualifications, previous experience, track record, and Integrity of the candidates.
For assessing the integrity and suitability, features like criminal records, financial position, civil actions undertaken to pursue personal debts, refusal of admission to and expulsion
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from professional bodies, sanctions applied by regulators or similar bodies and previous questionable business practice are considered. The members of the Committee are Mr. Arvind Pande, Mr. Ashim Samanta and Dr. Pandit Palande. Dr. Pandit Palande was inducted as member of the Committee. The Committee is chaired by Mr. Arvind Pande. All the members of the Committee are independent directors. The Committee met 2 (two) times during the year.
vii. FraudMonitoringCommittee Pursuant to the directions of the Reserve Bank of India, the Bank has constituted a Fraud Monitoring Committee, exclusively dedicated to the monitoring and following up of cases of fraud amounting to Rs.1 crore and above. The objective of this Committee is the effective detection of frauds and immediate reporting thereof to regulatory and enforcement agencies and actions taken against the perpetrators of frauds. The terms of reference of the Committee are as under: Identify the systemic lacunae, if any that facilitated perpetration of the fraud and Identify the reasons for delay in detection, if any, reporting to top management of Monitor progress of CBI / police investigation and recovery position. Ensure that staff accountability is examined at all levels in all the cases of Review the efficacy of the remedial action taken to prevent recurrence of frauds, Put in place other measures as may be considered relevant to strengthen
put in place measures to plug the same. the Bank and RBI.
Frauds and staff side action, if required, is completed quickly without loss of time. such as strengthening of internal controls. preventive measures against frauds.
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The members of the Committee are Mr. Jagdish Capoor, Mr. Aditya Puri, Mr. Keki Mistry and Mr. Arvind Pande. The Committee is chaired by Mr. Jagdish Capoor. The Committee met 4 (four) times during the year.
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Customer Service Committee The Committee monitors the quality of services rendered to the customers and also ensures implementation of directives received from RBI in this regard. The terms of reference of the Committee are to formulate comprehensive deposit policy incorporating the issues arising out of death of a depositor for operations of his account, the product approval process, and the annual survey of depositor satisfaction and the triennial audit of such services. The members of the Committee are Mr. Keki Mistry, Mr. Arvind Pande and Dr. Pandit Palande. Dr. Pandit Palande was inducted as memberoftheCommittee.
Grievance Redressal Mechanism In case of any complaint/grievance, the applicant/borrowers may contact the following: Address: Grievance Redressal Cell HDFC Bank Ltd. Old Bldg. ,"C" Wing, 3rdFloor, 26-A Narayan Properties, Chandivali Farm Road, Off Saki Vihar Road, Chandivali, Andheri East, Mumbai - 400 072. Email: customer_service@hdfcbank.com
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The Bank will acknowledge receipt of such complaint within 3 days, and will ensure that a response is provided within a period of 15 days.
Disputes arising out of decisions of the bank's functionaries would be disposed of at the next higher level within the Department concerned or at a central level in the bank.
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Conclusions
Good corporate governance is the blood that fills the veins of transparent corporate disclosures and high quality accounting practices. Strong corporate governance is thus indispensable and vibrant and it is an important instrument for investor protection. Risk management in banks has also been a prime focus to enhance corporate governance. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally (national institutional frameworks). RBI is also interacting closely with the Government and the SEBI in this regard. Increasing regulatory comfort in regard to standards of governance in banks gives greater confidence to shift from external regulation to internal systems of controls and risk-management. Each of the directors of the banks has a role in continually enhancing the standards of governance in banks through a combination of appropriate knowledge and values. Thus, the bankers and regulators should work together while conducting the operations of the banks to achieve best results.
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Bibliography
www.yahoosearch.com www.google.com www.answers.com www.rbi.org
www.sebi.com
www.hdfcbank.com
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