Page |1
CHAPTER 1:
INTRODUCTION
Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation (or company) compan y) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. In simpler terms it means the extent to which companies are run in an open & honest manner. Corporate governance has three key constituents namely: the Shareholders, the Board of Directors & the Management. Other stakeholders include employees, customers, creditors, suppliers, regulators, and the community at large. The concept of corporate governance identifies their roles & responsibilities as well as their rights in the context of the company. It emphasizes accountability, transparency & fairness in the management of a company compan y by its Board, so as to achieve sustained prosperity for all the stakeholders. Corporate governance is a synonym for sound management, transparency & disclosure. Transparency refers to creation of an environment whereby decisions & actions of the corporate are made visible, accessible & understandable. Disclosure refers to the process of providing information as well as its timely dissemination.
1.1- Background As mentioned earlier, the term ‗corporate governance‘ is related to the extent to which the companies are
transparent & accountable about their business. Corporate governance today has become a major issue of interest in most of the corporate boardrooms, academic circles & even governments around the globe. In the 20th century, in the immediate aftermath of the Wall Street Crash of 1929, legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. From the Chicago Chica go school of economics, Ronald Coase's Coase's "The "The Nature of the Firm" (1937) introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. Fifty y`ears later, Eugene Fama and Michael Jensen's Jensen's "The Separation of Ownership and Control" (1983, Journal Jo urnal of Law and Economics) firmly established agency theory as a way of understanding corporate co rporate governance: the firm is seen as a series of contracts. Agency theory's dominance was highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory: an assessement and review", Academy of Management Review). In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The
Page |2
California Public Employees' Retirement System (CALPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy coz y relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated). dated). In 1997, the East Asian Financial Crisis saw the economies of Thailand, of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack 2of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron of Enron and Worldcom, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Qwest, Arthur Andersen, Global Crossing, Tyco, etc. led to increased shareholder and governmental interest in corporate governance. Because these triggered some of the largest insolvencies, the public confidence in the corporate sector was sapped. The popular perception was that corporate leadership was fraught with greed & excess. Inadequancies & failure of the existing systems, brought to the fore, the need for norms & codes cod es to remedy them. This resulted in the passage of the Sarbanes-Oxley Act of 2002, (popularly known as Sox) by the United States. In India however, only when the Securities Exchange Board of India (SEBI), introduced Clause 49 in the Listing Agreement, for the first time in the financial year 2000 -2001, that the listed companies started embracing the concept of corporate governance. This clause was based on the Kumara Mangalam Birla Committee constituted by SEBI. After these recommendations were in place for about four years, SEBI, in order to evaluate & improve the existing practices, set up a committee under und er the Chairmanship of Mr. N.R. Narayana Murthy during 2002-2003.At the same time, the Ministry of Corporate Affairs set set up a committee under the Chairmanship of Shri. Naresh Chandra to examine the various corporate governance issues. The recommendations of the committee however, faced widespread protests & representations from the industry, forcing SEBI to revise them. Finally, on the 29th October, 2004, SEBI announced the revised Clause 49, which was implemented by the end of the financial year 2004-2005. Apart from Clause 49 of the Listing Agreement, corporate governance is also regulated through the provisions of the Companies Act, 1956. The respective provisions have been introduced in the Companies Act by Companies Amendment Act, 2000.
Page |3
1.2- Objectives The broader objective of this research is to understand the Corporate Governance processes of Indian Companies and to see the impact of Corporate Governance on the Financial Performance. These objectives can be summarized as under:
To understand the concept of corporate governance practices in true sense and in Indian context. To study the acceptance and implementation of corporate governance in Indian corporate. To study the corporate governance practices and measure in terms of corporate governance score. To know the impact of corporate governance on financial performance.
1.3- Definitions of Corporate Governance
"Corporate Governance Is A Field In Economics That Investigates How To Secure/Motivate Efficient Management Of Corporations By The Use Of Incentive Mechanisms, Such As Contracts, Organizational Designs And Legislation. This Is Often Limited To The Question O Improving Financial Performance, For Example, How The Corporate Owners Can Secure/Motivate That The Corporate Managers Will Deliver A Competitive Rate Of Return1
―Corporate Governance Deals With The Ways In Which Suppliers Of Finance To Corporations Assure Themselves Of Getting A Return On Their Investment‖.2
1.4- Principles Of Corporate Governance The Cadbury and OECD reports present general principals around which businesses are expected to operate to assure proper governance. They are as follows:
1 2
www.encycogov.com, Mathiesen [2002]. The Journal of Finance, Shleifer and Vishny [1997]
Page |4
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 openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
Interests of other stakeholders : Organizations should recognize that they have legal, contractual,
social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
Role and responsibilities of the board : The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment
Integrity and ethical behavior : Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision mak ing.
Disclosure and transparency : Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide stakeholders 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 b e timely and balanced to ensure that all investors have access to clear, factual information.
1.5- Need For Corporate Governance In India A corporation is a congregation of various stakeholders, namely customers, employees, investors, vendor partners, government and society. In this changed scenario an Indian corporation, as also a corporation elsewhere, should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today‘s globalized business world where corporations need to access global pools
of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporations need to recognize that their growth requires the cooperation of all the stakeholders; and such cooperation is enhanced by the corporations adhering to the best Corporate Governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the
Page |5
rest of the shareholders
1.6- Methodology A: Ratios (For measuring the Financial Performance) To evaluate a financial performance has been a difficult task for any researcher. However we have considered the following ratios as key financial performance indicator. There are several parameters to evaluate any financial statement. However as the focus of the research is on Corporate Governance, the following financial parameters are considered. They are as under : i) EBT / Sales ii) Sales / Total Assets iii) Earning Per Share iv) P/E Multiple
B: Questionnaire (For estimating Corporate Governance Code) The present study aims to examine the governance practices prevailing in the corporate sector within the Indian regulatory framework. The study is conducted to assess governance practices and process followed by Indian corporate houses. The study also aims to assess the substance and quality of reporting of Corporate governance practices in annual reports. The study aims to evaluate the state of compliance of various governance parameters in these companies. The parameters include the Statutory and Non mandatory requirements stipulated by revised Clause 49 of the listing agreement as prescribed by Securities and Exchange Board of India (SEBI) and relative amendments in the Companies Act, 1956.
1.7- Brief Review Of Literature
1.8- Benefits And Limitations The concept of corporate governance has been attracting public attention for quite some time. It contributes not only to the efficiency of a business enterprise, but also, to the growth and progress of a country's economy. Progressively, firms have voluntarily put in place systems of good corporate governance for the following reasons:
In today's globalised world, corporations need to access global pools of capital as well as attract and retain the best human capital from various parts of the world. Under such a scenario, unless
Page |6
a corporation embraces and demonstrates ethical conduct, it will not be able to succeed.
The credibility offered by good corporate governance procedures also helps maintain the confidence of investors – both foreign and domestic – to attract more long-term capital. This will ultimately induce more stable sources of financing.
corporation is a congregation of various stakeholders, like customers, employees, investors, vendor partners, government and society. Its growth requires the cooperation of all the stakeholders. Hence it imperative for a corporation to be fair and transparent to all its stakeholders in all its transactions by adhering to the best corporate governance practices.
Good Corporate Governance standards add considerable value to the operational performance of a company by: 1. improving strategic thinking at the top through induction of independent directors who bring in experience and new ideas; 2. rationalizing the management and constant monitoring of risk that a firm faces globally; limiting the liability of top management and directors by carefully articulating the decision making process ;
3. assuring the integrity of financial reports, etc. Effectiveness of corporate governance system cannot merely be legislated by law neither can any system of corporate governance be static. As competition increases, the environment in which firms operate also changes and in such a dynamic environment the systems of corporate governance also need to evolve. Failure to implement good governance procedures has a cost in terms of a significant risk premium when competing for scarce capital in today's public markets.
Page |7
CHAPTER 2: NATIONAL AND INTERNATIONAL SCENARIO 2.1- MAJOR DEVELOPMENTS AT INTERNATIONAL LEVELS Since the mid-1990s, at international level, various corporate governance reports, guidelines and regulations have come into existence. In this project the emphasis has been made on the following major international developments in corporate governance:
— Cadbury Committee Report — OECD Principles — The Sarbanes-Oxley Act 2002
1: Cadbury Committee Report on Corporate Governance In an attempt to prevent the recurrence of business failures in countries like UK and to raise th e standards of corporate governance, the Cadbury Committee, under the chairmanship of Sir Adrian Cadbury, was set up by the London Stock Exchange in May 1991. The Committee investigated accountability of the Board o f Directors to shareholders and to the society. The resulting report, and associated ―Code of Best Practices,‖ published in December 1992, was generally well received. The Cadbury Code of Best Practices had 19 recommendations. The recommendations are in the nature of guidelines relating to the Board of Directors, Non-executive Directors, Executive Directors and those on Reporting & Control.
2: Organization for Economic Co-operation and Development (OECD) – Principles Organization for Economic Co-operation and Development (OECD) – Principles OECD is a unique forum where the governments of 30 market democracies work together to address the economic, social and governance challenges of globalization as well as to exploit its opportunities. The organization provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies.
The OECD Council, meeting at Ministerial level on 27-28 April 1998, called upon the OECD to develop, in conjunction with national governments, other relevant international organizations and the private sector, a set of corporate governance standards and guidelines. In order to fulfill this objective, the OECD
Page |8
established the ad-hoc Task Force on Corporate Governance to develop a set of non-binding principles that embody the views of Member countries on this issue. The OECD revised its principles of corporate governance in the year 2004, which reflects a global consensus regarding the importance of good governance practices in contributing to economic viability and stability in economics.
3: The Sarbanes-Oxley Act Sarbanes-Oxley Act is a US law passed in 2002 to strengthen corporate governance and restore investor confidence. The Act was sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley. Sarbanes-Oxley law passed in response to a number of major corporate and accounting scandals involving prominent companies in the US. These scandals resulted in a loss of public trust in accounting and reporting practices. In July 2002, the Sarbanes- Oxley Act popularly called ‗SOX‘ was enacted. The Act made fundamental changes in virtually every aspect of corporate governance and particularly in the matters of auditor independence, conflict of interest, corporate responsibility and enhanced financial disclosures. SOX is wide ranging and establishes new or enhanced standards for all US public company Boards, Management, and public accounting firms. SOX contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties. It requires Security and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. SOX consists of new standards for Corporate Boards and Audit Committee, new accountability standards and criminal penalties for Corporate Management, new independence standards for External Auditors, a Public Company Accounting Oversight Board (PCAOB) under the Security and Exchange Commission (SEC) to oversee public accounting firms and issue accounting standards.
2.2- CORPORATE GOVERNANCE – DEVELOPMENTS IN INDIA In India, a small beginning was made by the Confederation of Indian Industry (Cll) in the field of good corporate governance which is explained below. Thereafter, various committees have been constituted to give recommendations in this regard viz.. Kumar Manglam Birla Committee, Naresh Chandra Committee, Narayana Murthy Committee etc.
1: Confederation of Indian Industry (CII) In 1996, CII took a special initiative on Corporate Governance, the theme of such initiative was to develop and promote a code for Corporate Governance to be adopted and followed by Indian Companies, be it in the Private Sector or Public Sector, Banks or Financial Institutions, all of which are corporate entities. A National Task Force was set up with Mr. Rahul Bajaj, as the Chairman and including members from industry, the legal profession, media and academia. This Task Force presented the draft guidelines and Code for Corporate Governance in April 1997 at the National Conference and Annual session of CII. After reviewing the various suggestions and the developments which have taken place in India and abroad, the Task Force finalized the Desirable Corporate Governance Code.
Page |9
2: Kumar Manglam Birla Committee The SEBI appointed a Committee on Corporate Governance on May 7, 1999 under the chairmanship of Shri Kumar Manglam Birla, to promote and raise the standards of corporate governance mainly from the perspective of the investors and shareholders and to prepare a code to suit the Indian corporate environment. Such committee submitted its interim & final report in 1999/2000. The Committee made a number of recommendations towards corporate governance which include constitution of audit committee, composition of Board of Directors, role of independent directors, & remuneration standard and financial reporting etc. On the basis of such recommendations clause 49 (pre-amended) of the listing agreement was issued by the SEBI.
3: Naresh Chandra Committee The next development is constitution of a committee by ‗Department of Company Affairs‘ (DCA), headed by Shri Naresh Chandra, called ‗Naresh Chandra Committee‘ on August 21, 2002, to examine various issues of corporate governance relating to statutory auditor - company relationship, rotation of statutory audit firm or partners, appointment of auditors and determination of audit fees, independence of auditing functions, certification of accounts and financial statements b y management and directors role of independent directors etc. Many recommendations of the report were incorporated in the Companies (Amendment) Bill 2003, which is currently being reviewed.
4: Narayana Murthy Committee Thereafter, ‗SEBI‘ constituted another committee called ‗Narayana Murthy Committee‘ under the Chairmanship of N.R. Narayana Murthy comprising 23 persons, which included representatives from the stock exchanges, Chamber of Commerce, industry, investor associations and Professional bodies, for reviewing implementation of the corporate governance code by listed companies.
Many of the recommendations made by such committee has been included in the revised Clause 49 of the Listing Agreement. The Narayana Murthy Committee attempted to promulgate an effective approach for successful corporate governance. The Committee submitted its final report on February 8, 2003.
5: The Securities and Exchange Board of India SEBI vide its circular no. SEBI/CFD/DIL/CG/1/2004/ 12/10, Dated Octob er 28, 2004 has revised the existing clause 49, related to corporate governance. The above circular has also amended many of the exiting provisions of Clause 49 of the listing agreement and has introduced a number of new requirements. The major changes in the new clause 49 include amendments/additions to provisions relating to definition of independent directors, strengthening the responsibilities of audit committees, improving quality of financial disclosures, including those related to related p arty transactions and proceeds from public/rights/preferential issues, requiring Boards to adopt formal code of conduct and requiring CEO/CFO certification of financial statements, etc. Such a step, if prope rly implemented, will go a long way towards ensuring good governance practices in Indian Corporate Sector.
P a g e | 10
CHAPTER 3: CONCEPTUAL FRAMEWORK 3.1- Clause 49 Of The Listing Agreement Clause 49 of the listing agreement: SEBI revise Clause 49 of the Listing Agreement pertaining to
corporate governance vide circular date October 29th, 2004, which superseded all other earlier circulars issued by SEBI on this subject.
All existing listed companies were required to comply with the
provisions of the new clause by 31st December 2005.
The major provisions included in the new Clause 49 are:
The board will lay down a code of conduct for all board members and senior management of the company to compulsorily follow.
The CEO an CFO will certify the financial statements and cash flow statements of the company.
If while preparing financial statements, the company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements, and the management should also provide an explanation for doing so in the corporate governance report of the annual report.
The company will have to lay down procedures for informing the board members about the risk management and minimization procedures.
Where money is raised through public issues etc., the company will have to disclose the uses/ applications of funds according to major categories ( capital expenditure, working capital, marketing costs etc) as part of quarterly disclosure of financial statements.
Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other than those specified in the offer document/ prospectus and place it before the audit committee. The company will have to publish its criteria for making its payments to non-executive directors in its annual report. Clause 49 contains both mandatory and non-mandatory requirements.
P a g e | 11
3.2- Steps Implemented By Companies Act With Regard To Corporate Governance The Ministry of Company Affairs appointed various committees on the subject of corporate governance which lead to the amendment of the companies Act in 2000. These amendments aimed at increasing transparency and accountabilities of the Board of Directors in the management of the company, thereby ensuring good corporate governance. The dealt with the following: 1. COMPLIANCE WITH ACCOUNTING STANDARDS – SECTION 210A As per this subsection inserted by the Companies Act, 1999 every profit and loss account and balance sheet of the company shall comply with the accounting standards. The compliance of Indian Accounting standards was made mandatory and the provisions for setting up of National Committee on accounting standards were incorporated in the Act.
2. INVESTORS EDUCATION AND PROTECTION FUND – SECTION 205C This section was inserted by the Companies Act 1999which provides that the central government shall establish a fund called the Investor Education and protection Fund and amount credited to the fund relate to unpaid dividend, unpaid matured deposits, unpaid matured Debenture, unpaid application money received by the companies for allotment of securities and due for refund and interest accrued on above amounts.
3. DIRECTOR‘S RESPONSIBILITY STATEMENT- SECTION 217(2AA) Subsection (2AA)added by the Companies Act, 2000 provides that the Boards report shall also include a Director‘s Responsibility statement with respect to the following matters:
a. Whether accounting standards had been followed in the preparation of annual accounts and reasons for material departures, if any; b. Whether appropriate accounting policies have been applied and on consistent basis; c. Whether directors had made judgments and estimate that are reasonable prudent so as to give a true and fair view of the state of affair and profit and loss of the company; d. Whether the directors had prepared the annual accounts on a going concern basis. e. Whether directors had taken proper and sufficient care for the maintenance of adequate accounting records for safeguarding the assets of the company.
P a g e | 12
4. NUMBER OF DIRECTORSHIPA- SECTION 275 As per this section of Companies Act, 2000 a person cannot hold office at same time as director in more than fifteen companies.
5. AUDIT COMMITTEES – SECTION 292A This section of the companies Act, 2000 provides for the constitution of audit committees by every public company having a paid- up capital of Rs.5 crores or more. Audit Committee is to consist of at least 3 directors. Two of the members of the Audit Committee shall be directors other than managing or whole time director. Recommendation of the Audit Committee on any matter related to financial management including audit report shall be binding on the Board.
6. PROHIBITION ON INVITIN OR ACCEPTING PUBLIC DPOSIT The Companies Act, 2000 has prohibited companies to invite/accept deposit from public.
7. SMALL DEPOSITOR- SECTIONS 58AA AND 58AAA The Companies Act, 2000 had added two new sections, viz, section a 58AA and 58AAA, for the protection of small depositors. These provisions are designed to protect depositors who have invested upto Rs. 20, 000 in a financial year in a company.
8. CORPORATE IDENTITY NUMBER Registrar of Companies is to allot a Corporate Identity Number to each company registered on or after November 1, 2000 (Valid circular No.)12/2000 dated 25-10-2000)
9. POWERS TO SEBI – SECTION 22A This section added Companies Act, 2000 empowers SEBI to administer the provisions contained in section 44 to 48, 59 to 84, 10, 109, 110, 112, 113, 116, 117, 118, 119, 120, 121, 122, 206, 206A and 207 so far as they relate to issue and transfer of securities and non payment of dividend. However, SEBI‘S power in this regard is limited to listed companies.
P a g e | 13
CHAPTER 4: PRESENTATION OF DATA, ANALYSIS AND FINDINGS 4.1- CLAUSE 49 – MANDATORY REQUIREMENTS I.
BOARD OF DIRECTORS
A. Composition of Board: 1. 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 . 2. Where the Chairman of the Board is non- executive directors, at least one third of the Board should comprise of independent directors and in case he is an executive directors, at least half of the Board should comprise of independent directors. 3. For the purpose of sub – clause (ii) the expression ‗independent director‘ shall mean a non executive director of the company who: a. Apart from receiving director‘s remuneration , does not have any material pecuniary relationships or transactions with the company, its promoters, its directors its senior management or its holding company, its subsidiaries and associated which many affects independence of the director. b. Is not related to promoters or persons occupying managements positions at the board level or at one level below the board; c. It not been executive or was not partner or an executive during the preceding three years, of any of the following: d. Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: i.
The statutory audit firm or the internal audit firm that is associated with the company, and ;
ii.
The legal firm(s) and consulting firm(s) that have a material association with the company
e. Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the directors; and
P a g e | 14
f. is not a substantial shareholder of the company i.e owning two percent or more of the block of voting shares. 4. Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors. However if the Dr. J.J. irani Committee recommendations on the proposed new company law are accepted, then directors, nominated by financial institutions and the government will not be considered independent. B. Non executive directors compensation and disclosures:
all fees/ 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 aggregate. However as per SEBI amendment made vide circular SEBI/ CFD/DIL/CG dated 12/1/06 sitting fees paid to non-executive directors as authorized by the Companies Act 1956, would not require the previous approval of shareholders. C. Other provisions as to Board and Committees: 1. The board shall meet at least four times a year, with a maximum time gap of three months between any two meetings. However SEBI has amended the clause 40 of the listing agreement vide circular SEBI/CFD/DIL/CG dated 12-1-06 as per which the maximum gap between two board meetings has been increased again to 4 months. 2. A director shall not be a member in more than 10 Audit and / or Shareholders grievance Committee or act as chairman of more than five Audit Shareholders Grievance committee across all companies in which he is a director. Furthermore it should e 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. D. Code of conduct: 1. The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted the website of the company, 2. 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 declaration to this effect signed by CEO.
P a g e | 15
II.
AUDIT COMMITTEE.
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:
1. The audit committee shall have minimum three directors as members. Two thirds of the members fo audit committee shall be independent directors. 2. All members of audit committee shall be financially literate an at least one member shall have accounting or related financial management expertise. 3. The chairman of the Audit Committee shall be an independent director. 4. The chairman of the Audit Committee shall be present at annual General Meeting to answer shareholder queries; 5. The audit committee may invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to the present at the meetings of the committee.
The finance director, head of internal audit and representative of the
statutory auditor may be present as invitees for the meeting of the audit committee; 6. 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 tow members or one third of the members of the audit committee whichever is greater, but there should be minimum of two independent members present.
C. Powers of Audit Committee: the audit committee shall have powers: 1. To investigate any activity within the 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 experts, if any.
D. Role of audit committee: the role for the audit committee shall include the following:
P a g e | 16
1. Oversight of the company‘s financial reporting process and the d isclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. 2. Recommending to the Board, the appointment re- appointment and if required the replacement or removal of the statutory auditor and the fixation of audit fees. 3. Approval of payment too statutory auditors for any other services rendered by the statutory auditors. 4. Reviewing, with the management the quarterly and annual financial statements before submission to the board for approval with reference to Director‘s Responsibility statement under section 217 (2AA)k, significant adjustments made in financial statements, compliance with listing requirements, disclosure of any related pending transaction etc. 5. Reviewing with the management performance of statutory and internal auditor and adequacy of the internal control systems. 6. Discussion with internal auditors regarding any significant findings including suspected frauds or irregularities and follow up thereon. 7. Reviewing the findings of any internal investigation by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control system of a material nature and reporting the matter to the board. 8. Discussion with statutory auditors before the audit commence, about the nature and scope of audit as well as post- audit discussion to ascertain any area of concern. 9. To look into the reason fo substantial defaults in the payments to the depositors, debenture holders, shareholders (in case of nonpayment of declared dividends) and creditors. 10. To review the functioning of the Whistle Blower mechanism, in case the same is existing. 11. Carrying out any other function as it mentioned in the terms of reference of the Audit Committee.
III.
SUBSIDARY COMPANIES
1. At least one independent director on the Board of Director of the holding company shal be a director on the Board of Directors of a material non listed Indian subsidiary company. 2. The audit committee of the listed holding company shall also review the financial statements, in particular, the investment made by the unlisted subsidiary company. 3. The minutes of the Board meeting of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company, the management should periodically bring to
P a g e | 17
the attention of the Board of Directors of the listed holding company, a statement of all significant transaction and arrangements entered into by the un listed subsidiary company.
IV.
DISCLOSURES
A. Basis of related party transactions:
1. A statement in summary form of transactions with related parties shall be placed periodically before the audit committee. 2. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee.
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 management‘s 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 Disclosure- Risk Management: the company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.
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 and annual basis.
E. Remuneration of Directors :
1. All pecuniary relationship or transactions of the non- executive directors vis-à-vis the company shall be disclosed in the Annual Report. 2. Further, certain prescribed disclosures on the remuneration of directors shall be made in the section on the corporation governance of the Annual Report;
P a g e | 18
3. The company shall disclose the number of shares and convertible instruments held by nonexecutive directors in the annual report. 4. Non executive directors shall be required to disclose their shareholding (both own or held by/ for other persons on a (beneficial basis) in the listed company in which they 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 directors.
F. Management:
As par t of the directors‘ report or as an addition there to a Management
Discussion and Analysis report, the following should form part of the Annual Report to the shareholders. This includes discussion on:
1. ;industry structure and developments. 2. Opportunities and threats. 3. Segment wise or product wise performance 4. Outlook 5. Risks and concerns. 6. Internal control systems and their adequacy 7. Discussion on financial performance with respect to operational performance. 8. Material developments in Human resources/ industrial Relations front including number of people employed.
G. Shareholders:
1. In case of the appointment of a new directors or reappointment of a director the shareholders must be provided with the following information: a. A brief resume of the director b. Nature of his expertise in specific functional areas; c. Names of companies in which the persons also holds directorship and the membership Committees of the Board; and d. Shareholding of non – executive directors.
P a g e | 19
2. A board committee under the chairmanship of a non- executive director shall be formed to specifically look into the redressal of shareholder and investor complaints like transfer of shares, non receipt of declared dividends etc.
this committee shall be designated as
‗Shareholders/Investors Grievance Committee‘.
3. To expedite the process of share transfer, 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. There delegated authority shall attend to share transfer formalities and least once in a fortnight. V.
CEO/CFO CERTIFICATION
Through the amendment made by SEBI vide circular SEBI /CFD/DIL CG DATED 12-1-06, in Clause 49 of the Listing Agreement, certification of intedrnal controls and internalcontrol s ystem CFO/CEO would be for the purpose of financial reporting. Thus the CEO, i.e. the Managing Direcctor 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:
1. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief: i.
These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
ii.
These statements together present a true and fair view of the company‘s affairs and are
in compliance within existing accounting standards, applicable laws and regulations.
2. There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which fraudulent, illegal or violative of the company‘s code of
conduct.
3. They accept responsibility for establishing and maintaining internal controls and they have evaluated the effectiveness of the internal control system of the company pertaining to financial reporting and they have disclosed to the auditors and the Audit Committee,
P a g e | 20
deficiencies in the design or operation of internal controls, if an, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies
4. They have indicated to the auditors and the Audit Committee significant changes in internal control over financial reporting during the year, significant fraud of which they have become aware and the involvement there in if any, of the management or an employee having a significant role in the company‘s internal control system over financial reporting.
VI.
REPORT ON CORPORATE GOVERNANACE
1. There shall be separate section on Corporate Governance in Annual Reports of Company with a detailed compliance report on Corporate Governance. Non compliance of any mandatory requirement of this clause with reason there of and the extent to which the non- mandatory requirements have been adopted should be specifically highlighted. 2. The companies shall submit a quarterly compliance report to the stock exchange within 15 days from the close of quarter as per the format given in 3. Annexure IB. the report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company.
VII.
COMPLIANCE
1. The company shall obtain a certificate from either the auditor 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 may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption / nonadoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.
P a g e | 21
4.2- CLAUSE 49 – NON-MANDATORY REQUIREMENTS (1)
THE BOARD
A non-executive Chairman may be entitled to maintain a Chairman‘s office at the company‘s 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 i. 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 company‘s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. ii. 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. iii. All the members of the remuneration committee could be present at the meeting. iv. 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. (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
P a g e | 22
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 non-executive directors.
(7)
WHISTLE BLOWER POLICY
The company may establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the company‘s 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. Once established, the existence of the mechanism may be appropriately communicated within the organization.
P a g e | 23
CASE STUDIES 1- Satyam Computers – „The Golden Peacock‟ Winner Committing The Biggest Fraud In Indian History. The name of the company in Sanskrit is word for truth. Outsourcing I.T. has been the hottest business in this hottest emerging market. Indian companies have been climbing the ranks of world leadership ever since the spread of high-speed telecommunications lines to Bangalore, Chennai and Mumbai made the country the favored destination. Satyam was not the first in the business, and it certainly was not the biggest. But it was a fast challenger, winning business that its bigger rivals would have embraced. Its shares traded in Mumbai, but it had grander ambitions. In the year ending 31st March, 2008 it had acquired four companies, in Belgium, the US and the UK. Its revenues had pushed past $2 billion, and more than 20 per cent of that fell through to pretax profits. Its motto ―A Commitment To Value Creation‖. It seemed like a fairy tale, too good to be true. Golden Peacock Winner
Satyam was, if not a paragon of good corporate governance, a pretty good example for listed companies with a dominant shareholder. It had just won Golden Peacock, an annual prize awarded by the World Council On Corporate Governance for quality in risk management and compliance. The Deal
On 16th December B. Ramalinga Raju, the major shareholder, founder and chairman, tried to push through two more acquisitions-this time of companies controlled by his family, where his sons led the management. It was a swaggering move: $ 1.6 billion- almost all the current assets on Satyam‘s books- for 51% (per cent) of Maytas Infrastructure and all of Maytas Properties. The latter was an unlisted company for which the only public information available was the size of its property holding. Maytas, of course, is Satyam, spelled backwards. The World Bank
Just before taking its Christmas break, the World Bank Group in Washington struck Satyam off its register of suppliers for eight years. Satyam urged the World Bank to withdraw its comments about the decisions. The Resignations
On 25th December, 2008, Dr. Mangalam Srinivasan, who had chaired the compensation committee, resigned from the board, ending a 17- year relationship.On 29th December three more independent directors resigned. M. Rammohan Rao, who had chaired the controversial 16th December board meetings where the Maytas acquisition was announced, joined Krishne Palepu and Vinod K. Dham in leaving the company.
P a g e | 24
The Sell-Offs
Outside the investors were getting a bit nervous, as expected. The share price was even weaker than the prevailing poor market sentiments present at that time. But one day, the selling pressure became intense as a very large block of shares hit the market. Perhaps some of the founder‘s stake had changed hands as collateral for loans. The lender may have put it up for sale to cover the loans. The game was up. Another, Bigger Resignation
On 7 th January, B. Ramalinga Raju, chairman and ‗promoter‘ of the company, as Indian usage has it, announced that he was stepping down. It seemed there was a hole of $ 1 billion in the accounts. The reported 20+ per cent return on sales had really been only 3 per cent. Was the failed deal to buy the other Raju-controlled companies a last-ditch effort to plug the whole? Or was it instead to drain the remaining cash out of Satyam and into the family‘s bank accounts? And Where Was The Corporate Governance???
The dust was still settling. The board had been reconstituted and urgent meetings had been underway to keep it afloat. A global recession did not help, of course, but Satyam would have been in trouble under any circumstances. This company had followed all the codes, indeed it exceeded governance standards as mandated in India, even sought to emulate standards in the UK and to meet the New York Stock Exchange guidelines. The ―Shareholder Grievance Committee‖ – designed to anticipate concerns over related party dealings had by then seemed a bad joke. Postscript
PWC‘s global CEO Samuel DiPiazza skipped the World Economic Forum‘s shinding in Davos, Switzerland, at the end of January 2009. He was in India, dealing with the arrest of two PwC partners involved in the Satyam audit. KPMG and Deloitte had taken over the audit duties. A majority shareholding in Satyam was acquired by another Indian technology and consulting firm, Tech Mahindra. The rebranded Mahindra Satyam retained a listing on the New York Stock Exchange. The World Council on Corporate Governance stripped Satyam of its Golden Peacock.
The Conclusion Of The Satyam Scam Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India‟s fourth largest company in India‟s IT industry, offering a variety of IT services to many types of businesses. Its‟ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On th
7 January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account.
Raju confessed that Satyam‟s balance sheet of 30 September 2008 contained :
P a g e | 25
Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as against Rs 5,361 crores (US$ 1.1 billion) reflected in the books].
An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.
An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds which were arranged by himself.
An overstated debtors‟ position of Rs. 490 crores (US$ 100.94 million) [as against Rs. 2,651 crores (US$ 546.11 million) in the books]. The letter by B Ramalinga Raju where he confessed of inflating his company‟s revenues contained the following statements: “What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly [annualised revenue run rate of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.”
P a g e | 26
2- AN OVERVIEW ON TATA STEEL LIMITED Established in 1907, Tata Steel, the flagship company of the Tata group is the first integrated steel plant in Asia and is now the world`s second most geographically diversified steel producer and a Fortune 500 Company. Backed by 100 glorious years of experience in steel making, Tata Steel is the world‘s 6th largest steel c ompany with an existing annual
crude steel production capacity of 30 Million Tonnes Per Annum (MTPA). Tata Steel has a balanced global presence in over 50 developed European and fast growing Asian markets, with manufacturing units in 26 countries. It was the vision of the founder; Jamsetji Nusserwanji Tata, that on February 27, 1908, the first stake was driven into the soil of Sakchi. His vision helped Tata Steel overcome several periods of adversity and strive to improve against all odds. Tata Steel`s Jamshedpur (India) Works has a crude steel production capacity of 6.8 MTPA which is slated to increase to 10 MTPA by 2010. The Company also has proposed three Greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh in India with additional capacity of 23 MTPA and a Greenfield project in Vietnam. Through investments in Corus, Millennium Steel (renamed Tata Steel Th ailand) and NatSteel Holdings, Singapore, Tata Steel has created a manufacturing and marketing network in Europe, South East Asia and the pacific-rim countries. Corus, which manufactured over 20 MTPA of steel in 2008, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel Thailand is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MTPA. Tata Steel has proposed a 0.5 MTPA mini blast furnace project in Thailand. NatSteel Holdings produces about 2 MTPA of steel products across its regional operations in seven countries. Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also entered the steel building and construction applications market. The iron ore mines and collieries in India give the Company a distinct advantage in raw material sourcing. Tata Steel is also striving towards raw materials security through joint
P a g e | 27
ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. Tata Steel has signed an agreement with Steel Authority of India Limited to establish a 50:50 oint venture company for coal mining in India. Also, Tata Steel has bought 19.9% stake in New Millennium Capital Corporation, Canada for iron ore mining. Exploration of opportunities in titanium dioxide business in Tamil Nadu, ferro-chrome pl ant in South Africa and setting up of a deep-sea port in coastal Orissa are integral to the Growth and Globalisation objective of Tata Steel. Tata Steel India is the first integrated steel company in the world, outside Japan, to be awarded the Deming Application Prize 2008 for excellence in Total Quality Management. Business divisions of the company:
Bearings Division : Manufactures ball bearings, double row self-aligning bearings,
magneto bearings, clutch release bearings and tapered roller bearings for two wheelers, fans, water pumps, etc.
Ferro Alloys and Minerals Division : Operates chrome mines and has units for
making ferro chrome and ferro manganese. It is one of the largest players in the global ferro chrome market.
Agrico Division : Tata Agrico is the first organized manufacturer in India of h and
tools and implements for application in agriculture.
Tata Growth Shop (TGS) : Has designed, developed, manufactured, erected and
commissioned thousands of tonnes of equipment ranging from overhe ad cranes to high precision components, including a rocket launch pad for the Indian Space and Research Organization.
Tubes Division : The biggest steel tube manufacturer with the largest market share
in India, it aspires to strengthen its market presence by ex panding and modernizing its commercial and precision tube manufacturing capacity.
Wire Division : A pioneer in the manufacture of steel wires in India, it produces
coated and uncoated wires, branded as Tata Wiron. The division also operates a wholly owned subsidiary in Sri Lanka. Joint ventures and Associates:
P a g e | 28
Corus- Europe‘s second largest steel maker with operations in the UK and mainland Europe
Tinplate Company of India Limited (TCIL)
Tayo Rolls Limited
Tata Ryerson Limited (TRYL)
Tata Refractories Limited (TRL)
Tata Sponge Iron Limited (TSIL)
Tata Metaliks
Tata Pigments Limited
Jamshedpur Injection Powder Limited (Jamipol)
TM International Logistics Limited (TMILL)
mjunction services limited
TRF Limited
Jamshedpur Utility and Service Company Limited (JUSCO)
The Indian Steel and Wire Products Limited (ISWP)
Tata BlueScope Steel Limited
Dhamra Port Company, Orissa
Hooghly Met Coke & Power Company
Lanka Special Steel Limited
Sila Eastern Company Limited
NatSteel Holdings (NSH)
Tata Steel Thailand
Tata Steel KZN- South Africa
Tata NYK : A joint venture with Nippon Yusen Kabushiki Kaisha
Achievements/ recognition:
Tata Steel stall bags first prize in 'Heavy Industry' category at Ud yog Mela-2011, Ranchi Ranchi, March 17, 2011
Tata Steel has won `The Businessworld Most Respected Compan y Award 2011‘ in
the Metals category.
TATA Steel received two awards under the‗Rashtriya Khel Protsahan Puraskar‘ for its remarkable contribution spanning several decades in the field of sports in 2009.
Tata Steel India awarded the Deming Application Prize 2008 for excellence in Total
P a g e | 29
Quality Management. It is the first integrated steel company in the world, outside Japan to get this award.
World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two consecutive years) in its annual listing in February 2006.
Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times. It has been awarded Asia's Most Admired Knowledge Enterprise award five times in 2003, 2004, 2006, 2007 and 2008.
Conferred the prestigious Global Business Coalition Award for Business Excellence in the Community in recognition of its pioneering work in the field of HIV/ AIDS awareness.
Tata Steel works has been conferred the prestigious social accountability (SA) 8000 certification by social. Accountability international (SAI), USA. It is the first steel company in the world to receive this certificate.
Corporate Sustainability Report of Tata Steel hailed by United Nation's Environment Programme (UNEP) and Standard and poor as strongest, submitted by any corporate house from emerging economies.
Best governed company Award 2006 for setting high standards in governance practices.
Tata Steel won 'Award for Corporate Social Responsibility in Public health' by USIndian Business Council (USIBC), Population Services International (PSI) and the center for Strategic and International Studies (CSIS) in 2007
