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Reports On

Corporate
Governance
Chetna
Shruti Agarwal

CII code of best practice


A CII Best Practice is a process or method that,
when executed effectively, leads to enhanced
project performance. CII Best Practices have been
proven through extensive industry use and/or
validation.

Meaning
Corporate governance refers to the set of systems, principles and processes
by which a company is governed.
They provide the guidelines as to how the company can be directed or
controlled so to achieve its goals.
Beneficial for all stakeholders in the long terms.
Stakeholders includes everyone ranging from boar of directors,
management, shareholders to customers, employees and society.

Driving forces of CG in
india

Unethical business practices:- security scams.

Impact of Globalization:- Foreign investors expectations, integration


with foreign market.
Impact of privatization:- new structure of ownership , MNCs.

Committees for Reforms


CII code of desirable corporate governance.
Kumar Manglambirla committee(2000)
RBI report of the advisory group on corporate governance(2001)
Naresh Chandra committee(2002)
N.R. Narayan Murthy committee(2003)
J.J Irani committee(2005)

Kumar Mangalam Birla


Report

Definition
The Kumar Mangalam Birla Committee constituted by SEBI has
observed that:
Strong corporate governance is indispensable to resilient and
vibrant capital markets and is an important instrument of investor
protection. It is the blood that fills the veins of transparent corporate
disclosure and high quality accounting practices. It is the muscle that
moves a viable and accessible financial reporting structure.

Kumar Mangalam Birla


Report

In 1999 SEBI constituted- under the chairmanship of Shri


Kumarmangalam Birla
Committee submitted its report in year 2000.
Based on these recommendations Clause 49 was incorporated in
the Listing Agreement.
1. Board should have an optimum combination of Executive and NonExecutive directors and at least 50 % should be non-executive.
2. An independent Audit committee should be set up by Board.
3. Remuneration Committee should be set up by Board.
4. There should be a separate section on CG in Annual Report with
details on level of compliance by the company.

The Recommendations of
the Committee

This Report is the first formal and comprehensive attempt to


evolve a Code of Corporate Governance, in the context of
prevailing conditions of governance in Indian companies, as well
as the state of capital markets.

While making the recommendations the Committee has been


mindful that any code of Corporate Governance must be dynamic,
evolving and should change with changing context and times. It
would therefore be necessary that this code also is reviewed from
time to time, keeping pace with the changing expectations of the
investors, shareholders, and other stakeholders and with
increasing sophistication achieved in capital markets.

Applicability of the
Recommendations
Mandatory and non mandatory recommendations.
The committee divided the recommendations into two categories,
namely, mandatory and non- mandatory.
The recommendations which are absolutely essential for corporate
governance can be defined with precision and which can be enforced
through the amendment of the listing agreement could be classified
as mandatory.

Mandatory
Recommendations

Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And


Above.
Composition Of Board Of Directors Optimum Combination Of Executive
& Non-Executive Directors .
Audit Committee With 3 Independent Directors With One Having
Financial And Accounting Knowledge.
Remuneration Committee.
Board Procedures at least 4 Meetings Of The Board In A Year With
Maximum Gap Of 4 Months Between 2 Meetings. To Review Operational
Plans, Capital Budgets, Quarterly Results, Minutes Of Committee's
Meeting. Director Shall Not Be A Member Of More Than 10 Committee
And Shall Not Act As Chairman Of More Than 5 Committees Across All
Companies
Management Discussion And Analysis Report Covering Industry Structure,
Opportunities, Threats, Risks, Outlook, Internal Control System.
Information Sharing With Shareholders.

Non-Mandatory
Recommendations

Role Of Chairman
Remuneration Committee Of Board
Shareholders' Right For Receiving Half Yearly Financial
Performance Postal Ballot Covering Critical Matters Like
Alteration In Memorandum Etc
Sale Of Whole Or Substantial Part Of The Undertaking
Corporate Restructuring
Further Issue Of Capital
Venturing Into New Businesses

Suggested List Of Items To Be Included In 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.
3. Audit Committee.
4. Remuneration Committee report.
5. Shareholders Committee
6. General Body meetings.
7. Disclosures.
8. Means of communication..
9. General Shareholder information

The Naresh Chandra


Committee

The Naresh Chandra


Committee

It has suggested that the partners and at least 50% of the

The committee also recommends that no partner or member of the


engagement team should be employed by or become a director of
a client company with whom he worked preceding two years.

The committee has considered the need for reviewing the manner
in which the three professional bodies- the Institute of Chartered
Accountants. Cost and Works Accountants, the Company
Secretaries regulate their membership. It has recommended the
setting up of independent quality review boards (QRBs), one for
each of the three organizations.

It has also recommended the setting up of Corporate Serious Fraud


Office for punishing erring professionals.

engagement team responsible for either the audit of a listed


company should be rotated every five years

Disclosure of Contingent Liabilities


(Section 2.5)

4.2.1 The Committee makes the following mandatory


recommendation:
Management should provide a clear description in plain
English of each material contingent liability and its risks,
which should be accompanied by the auditors clearly
worded comments on the managements view. This section
should be highlighted in the significant accounting policies
and notes on accounts, as well as, in the auditors report,
where necessary. This is important because investors and
shareholders should obtain a clear view of a companys
contingent liabilities as these may be significant risk factors
that could adversely affect the companys future financial
condition and results of operations.

CEO / CFO Certification


The Committee makes the following mandatory recommendation:
They have reviewed the balance sheet and profit and loss
account and all its schedules and notes on accounts, as well as
the cash flow statements and the Directors Report;
These statements do not contain any material untrue
statement or omit any material fact nor do they contain
statements that might be misleading.
These statements together present a true and fair view of the
company, and are in compliance with the existing accounting
standards and / or applicable laws / regulations.
They have indicated to the auditors, the Audit Committee and
in the notes on accounts, whether or not there were significant
changes in internal control and / or of accounting policies
during the year.

Independent Director Exemptions

Legal provisions must specifically exempt non-executive and


independent directors from criminal and civil liabilities under
certain circumstances. SEBI should recommend that such
exemptions need to be specifically spelt out for the relevant
laws by the relevant departments of the Government and
independent regulators, as the case may be. However,
independent directors should periodically review legal
compliance reports prepared by the company as well as steps
taken by the company to cure any taint. In the event of any
proceedings against an independent director in connection
with the affairs of the company, defense should not be
permitted on the ground that the independent director was
unaware of this responsibility.

Narayan Murthy committee


report

Audit Committees
Audit committees of publicly listed companies should be required to
review the following information mandatorily:
Financial statements and draft audit report, including quarterly / halfyearly financial information;
Management discussion and analysis of financial condition and results
of operations;
Reports relating to compliance with laws and to risk management;
Management letters / letters of internal control weaknesses issued by
statutory internal auditors; and
Records of related party transactions.
All audit committee members should be financially literate and at
least one member should have accounting or related financial
management expertise.

Audit Reports and Audit


Qualifications

In case a company has followed a treatment different from that


prescribed in an accounting standard, management should justify
why they believe such alternative treatment is more
representative of the underlying business transaction.
Management should also clearly explain the alternative
accounting treatment in the footnotes to the financial statements.

Related Party
Transactions

A statement of all transactions with related parties including their


bases should be placed before the independent audit committee
for formal approval / ratification. If any transaction is not on an
arms length basis, management should provide an explanation to
the audit committee justifying the same.

Risk Management
Procedures should be in place to inform Board members about the
risk assessment and minimization procedures. These procedures
should be periodically reviewed to ensure that executive
management controls risk through means of a properly defined
framework.
Management should place a report before the entire Board of
Directors every quarter documenting the business risks faced by the
company, measures to address and minimize such risks, and any
limitations to the risk taking capacity of the corporation. This
document should be formally approved by the Board.

Proceeds from Initial Public


Offerings (IPO)
Companies raising money through an Initial Public Offering (IPO)
should 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.
On an annual basis, the company shall prepare a statement of funds
utilized for purposes other than those stated in the offer document/
prospectus. This statement should be certified by the independent
auditors of the company. The audit committee should make
appropriate recommendations to the Board to take up steps in this
matter.

Code of Conduct
It should be obligatory for the Board of a company to lay down the
code of conduct for all Board members and senior management of a
company. This code of conduct shall be posted on the website of the
company.

All Board members and senior management personnel shall affirm


compliance with the code on an annual basis. The annual report of
the company shall contain a declaration to this effect signed off by
the CEO and COO.

Non-Executive Director
Compensation
All compensation paid to non-executive directors may be fixed by
the Board of Directors and should be approved by shareholders in
general meeting.
Alternatively, this may be put up on the companys website and
reference drawn thereto in the annual report.
Non-executive directors should be required to disclose their stock
holding (both own or held 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 accompany their notice of appointment.

Independent Directors
The term independent director is defined as a non-executive
director of the company who:
Apart from receiving director remuneration, does not have any
material pecuniary relationships or transactions with the
company
Is not related to promoters or management at the board level or
at one level below the board;
Has not been an executive of the company in the immediately
preceding three financial years;

Whistle Blower Policy

Personnel who observe an unethical or improper practice (not


necessarily a violation of law) should be able to approach the
audit committee without necessarily informing their supervisors.

Real Time Disclosures


It was suggested that SEBI should issue rules relating to real-time
disclosures of certain events or transactions that may be of
importance to investors, within 3-5 business days. These would
include events such as

a change in the control of the company,


a companys acquisition / disposal of a significant amount of
assets,
bankruptcy or receivership,
a change in the companys independent auditors, and
the resignation of a director.

Accounting standards and


Corporate governance

In recent years, the Indian economy has undergone a number of


reforms, resulting in a more market-oriented economy. Particularly, after
the Government of India has taken steps towards liberalization and
globalization of the economy, the size of Indian corporate is becoming
much bigger and accordingly the expectations of various stakeholders
are also increasing, which can be satisfied only by the good Corporate
Governance.

The importance of good Corporate Governance has also been


increasingly recognized for improving the firms competitiveness, better
corporate performance and better relationship with all stakeholders(1),
because of which the Indian Corporate have obliged to reform their
principles of Governance. For that purpose, Indian companies will now
be required to make more and more elaborate disclosures than have
been making hitherto, for which they are also required to adhere to the
uniform and proper accounting standards, as the standards reduce
discretion, discrepancy and improves the utility of the disclosure.

ISSUES

In few accounting standards, such as, valuation of inventories and


depreciation accounting, the alternative accounting treatment is
allowed. This kind of flexibility creates problems in judging the quality
and reliability of financial statements of an enterprise and the different
methods are followed for different companies or for different periods,
the possibility of inter-unit, intra-industry or inter-period comparison is
impaired. The lack of comparability renders the financial information
less useful and creates confusion in the minds of the investing public.

Some of the accounting standards are more in the nature of


disclosure than accounting requirements. For example, AS-5 requires a
separate disclosure of prior period items and it does not provide the
mechanism to estimate the impact of prior period items on current
years operation.

ISSUES

In case of construction contracts, AS-7 provides for adoption of


either completed contract method or percentage of completion
method for recognition of profit on completed contract, which
attracts the same limitation of comparability.
The hybrid method of accounting i.e. accounting for income on
cash basis and expenditure on accrual (mercantile basis), followed
by corporates, conveniently allows them to manipulate their
reports.
The all IAS are not adopted by IASB for India. Just 15 standards
adopted out of 33 IAS, left the various fields as un covered.
The standards setting process is closed and narrow and the
execution is unsound, that causes the various practices and
imperfect disclosure, which defeats the prime objective of
accounting standards in achieving the good Corporate
Governance.

The standards setting process is closed and narrow and the


execution is unsound, that causes the various practices and
imperfect disclosure, which defeats the prime objective of
accounting standards in achieving the good Corporate
Governance.