The following section highlights key features and practices of corporate governance for Indian listed companies.
The organizational framework for corporate governance initiatives in India consists of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). SEBI monitors and regulates corporate governance of listed companies in India through Clause 49. This clause is incorporated in the listing agreement of stock exchanges with companies and it is compulsory for listed companies to comply with its provisions. MCA through its various appointed committees and National Foundation for Corporate Governance (NFCG), a not-for-profit trust, facilitates exchange of experiences and ideas amongst corporate leaders, policy makers, regulators, law enforcing agencies and non- government organizations.
In addition to various acts and guidelines by the regulator, non-regulatory bodies have also published codes and guidelines on Corporate Governance. For example, Desirable Corporate Governance Code by the Confederation of Indian Industries (CII). The issue of corporate governance for listed companies came into prominence with the report of the Kumar Mangalam Birla Committee (2000) set up by SEBI in the to suggest inclusion of a new clause, Clause 49 in the Listing Agreement to promote good corporate governance. On 21 August 2002, the Ministry of Finance appointed the Naresh Chandra Committee to examine various corporate governance issues primarily around auditor – company relationship, rotation of auditors and defining Independent directors. This was followed by constitution of the Narayana Murthy Committee (2003) by SEBI which provided recommendations on issues such as audit committee’s responsibilities, audit reports, independent directors, related parties, risk management, independent directors, director compensation, codes of conduct and financial disclosures. Many of these recommendations were then incorporated in the Revised Clause 49 that is seen as an important statutory requirement.
Recently the Ministry of Corporate Affairs has placed before the Indian parliament, Companies Bill 2008 that provides for greater shareholder democracy and less government intervention. The new legislation will try to promote protection of rights of minority shareholders, self-regulation with adequate disclosure and accountability, and lesser government control over internal corporate processes.
Board of Directors
In furtherance to the same the Kumar Mangalam Birla Committee, Naresh Chandra Committee and the Narayana Murthy Committee recommended constitution, composition for audit committee to include independent directors and also formulated the responsibilities, powers and functions of the Audit Committee. The Audit Committee and its Chairman are also entrusted with the ethics and compliance mechanisms of an organization, including review of functioning of the whistleblower mechanism, where it exists.
Role of Institutional Investors
Shareholders' Grievance Committee
Risk Management was however propounded for the first time by the Narayana Murthy Committee (2003) in its report by which it required that 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. This is incorporated in the Revised Clause 49 as a part of internal disclosures to the Board.
Every organization whether it is a company, club or a fraternal order, has expectations of how its members should act among each other and with those outside its organization. A code of conduct creates a set of rules that become a standard for all those who participate in the group and exists for the express purpose of demonstrating professional behaviour by the members of the organization.
The Naresh Chandra Committee for the first time recommended that companies should have an internal code of conduct. The Report by Narayana Murthy Committee further recommended that a company should have a mechanism (whistle blower) to report on any unethical or improper practice or violation of code of conduct observed and that Audit Committee would be entrusted with the role of reviewing functioning of the mechanism.
The Revised Clause 49 incorporated these recommendations further mandating directors of every listed company to lay down a Code of Conduct and post the code on their company’s website. The Board members and all senior management personnel are required to affirm compliance with the code annually and include a declaration to this effect by the CEO in the Annual Report. The Whistleblower still remains a non-mandatory recommendation though the Revised Clause provides protection to the whistle blower from victimization and direct access to the Chairman of the Audit Committee. The recommendation of Narayana Murthy Committee to make Audit Committee responsible for reviewing the functioning of the whistle blower mechanism, where it exists, is incorporated in the Revised Clause 49.
The overriding principle in respect of directors’ remuneration is that of openness and shareholders are entitled to a full and clear statement of benefits available to the directors. Though the Revised Clause 49 does not mandate formation of a Remuneration Committee, Section 309(1) of the Companies Act, 1956 requires that the remuneration payable both to the executive as well as non-executive directors be determined by the board in accordance with and subject to the provisions of section 198 either by the articles of the company or by resolution or if the articles so require, by a special resolution, passed by the company in a general meeting. Further, Schedule VI of the Act requires disclosure of Director's remuneration and computation of net profits for that purpose.
The Desirable Corporate Governance Code by CII (1998) also mandated the disclosure of each director’s remuneration and commission as a part of Director’s Report. It also allowed commission and stock options for non-executive directors, subject to the attendance being presented before shareholders. The Kumar Mangalam Committee then in its report included a non-mandatory requirement to constitute a Remuneration Committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. It also required compulsory disclosures to be made in the section on corporate governance of the annual report:
- All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc.
- Details of fixed component and performance linked incentives, along with the performance criteria.
- Service contracts, notice period, severance fees.
- Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable.
The Naresh Chandra Committee further recommended on remuneration of Independent directors.
Presently, under Revised Clause 49, all fees/compensation, if any paid to non-executive directors, including independent directors, are to be fixed by the Board of Directors and require previous approval of shareholders in general meeting. The shareholders’ resolution is to 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.
Internal control is a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:
− Effectiveness and efficiency of operations,
− Reliability of financial reporting, and
− Compliance with applicable laws and regulations.
The Naresh Chandra Committee for the first time required the signing officers, to declare that they are responsible for establishing and maintaining internal controls which have been designed to ensure that all material information is periodically made known to them; and have evaluated the effectiveness of internal control systems of the company. Also, that they have disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these deficiencies.
The Revised Clause 49 requires the CEO and CFO to certify to the board the annual financial statements in the prescribed format and the establishment of internal control systems and processes in the company. CEOs and CFOs are, thus, accountable for putting in place robust risk management and internal control systems for their organization’s business processes.
India Governance Links
Laws, Regulations and Reports
- The Companies Act of 1956
- The Companies Bill of 2012
- The Desirable Corporate Governance - a code
- The Naresh Chandra Committee Report
- The Kumar Mangalam Birla Committee Report
- The N R Narayana Murthy Committee Report
- Revised Clause 49 of the Listings Agreement
- National Foundation for Corporate Governance (NFCG)
- Corporate Governance section from the Business Portal of India
- The Competition Commission of India
- The Central Vigilance Commission of India
- Confederation of Indian Industries (CII)
- Institute of Internal Auditors (IIA) India
- Bombay Chartered Accountants Society (BCAS)
- Asian Corporate Governance Association (ACGA)
- Information Systems Audit and Control Association (ISACA)