1. CHAPTER 5
CORPORATE GOVERNANCE
 CONCEPT OF CORPORATE GOVERNANCE
Corporate governance is the structure and the associations which govern corporate
direction and performance. The board of directors have dominant role in corporate
governance. Its relationship to the other primary participants, typically shareholders
and management, is critical. Other members include employees, customers, suppliers,
and creditors. The corporate governance framework also depends on the legal,
regulatory, institutional and ethical environment of the community. Usually, corporate
governance is described as the host of legal and non-legal principles and practices
affecting control of publicly held business firms. Broadly speaking, corporate
governance affects not only who controls publicly traded corporations but also the
allocation of risks and returns from the firm's activities among the various
contributors in the firm, including stockholders and managers as well as creditors,
employees, customers, and even societies.
Many management scholars have recognized that strong corporate governance is vital
to resilient and vibrant capital markets and is an important tool of investor protection.
According to The Institute of Company Secretaries of India, “Corporate Governance
is the application of best management practices, compliance or jaw in true letter and
spirit and adherence to ethical standards for effective management and distribution of
wealth and discharge of social responsibility for sustainable development of all
stakeholders”. Cadbury Committee (U.K.), 1992 has defined corporate governance as
“Corporate governance is the system by which companies are directed and controlled.
It encompasses the entire mechanics of the functioning of a company and attempts to
put in place a system of checks and balances between the shareholders, directors,
employees, auditor and the management." Other group of scholars explained the term
corporate governance as “process and structure by which the business and affairs of
the company are directed and managed in order to enhance long term shareholder
value through enhancing corporate performance and accountability, whilst taking into
account the interests of other stakeholders".
Firms at global level recognising that better corporate governance adds substantial
value to their operational performance in the following ways:

2. 1. It improves strategic thinking at the top by inducting independent directors who
bring a wealth of experience, and a host of new ideas.
2. It justifies the management and monitoring of risk that a firm faces globally.
3. It limits the responsibility of senior management and directors, by carefully
articulating the decision making process
4. It assures the integrity of financial reports.
5. It has long term reputational effects among main stakeholders, both internally and
externally.
REVIEW OF CORPORATE GOVERNANCE IN INDIA
The notion of corporate governance has been incepted with major objective of
significant disclosure of information to the shareholders. Since then, corporate
governance has steered the Indian companies. As the time changed, there was also
need for greater accountability of companies to their shareholders and customers. The
report of Cadbury Committee on the financial aspects of corporate Governance in the
U.K. has given rise to the discussion of Corporate Governance in India. Corporate
governance has been since olden times but it was in different form. During Vedic
times, kings used to have their ministers and used to have ethics, values, principles
and laws to run their state but today it is in the form corporate governance having
same rules, laws, ethics, values, and morals which helps in running corporate bodies
in the more effective ways so that they in the age of globalization become global
giants.
There have been numerous corporate governance initiatives launched in India since
the mid-1990s. The first was by the Confederation of Indian Industry (CII), India's
major industry and business association, which emerged with the first voluntary code
of corporate governance in 1998. The second was by the SEBI, now enshrined as
Clause 49 of the listing agreement. SEBI in 2000 introduced unparalleled corporate
governance reforms via Clause
49 of the Listing Agreement of Stock Exchanges. Clause 49, a seminal event in Indian
corporate governance, established a number of governance requirements for listed
companies with a focus on the role and structure of corporate boards, internal controls
and disclosure to shareholders. The third was the Naresh Chandra Committee, which
submitted its report in 2002. The fourth was again by SEBI the Narayana Murthy
Committee, which also submitted its report in 2002.

3. India's corporate governance reform efforts did not stop after implementation of
Clause 49. In January 2009, the Indian corporate community was astounded by
enormous accounting scandal involving Satyam Computer Services (Satyam), one of
India's largest information technology companies. As a result of the scandal, Indian
regulators and industry groups have promoted for a number of corporate governance
reforms to address some of the concerns raised by the Satyam scandal. Some of these
responses have moved forward, mainly through introduction of voluntary guidelines
by both public and private institutions.
Generally, India's corporate governance transformation efforts reflect the following:
1. Significant industry involvement in assisting the government with crafting
corporate governance measures.
2. Substantial focus to enhance the function and structure of company boards,
including (i) emphasis on the independence of the board of directors, and (ii) an
increased role for audit committees.
3. Noteworthy increase in disclosure to public shareholders.
Several Indian Companies such as PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance
are some of the global giants which have their flag of success flying high in the sky
due to good corporate governance.
 MAJOR CHANGES TO CLAUSE 49
Independent director: 1/3 or ½ depending whether the chairman of the board is a
non-executive or executive position.
Non-Executive Directors: The total term office of the non-executive directors is now
limited to 3 terms of 3 years each.
Board of directors: The board is required to frame a code of conduct for all board
members and senior management and each of them have to annually affirm
compliance with the code.
Disclosures: Contingent liabilities basis of related party transactions , risk
management proceeds from initial public offering.

4. Audit committee: Financial statements and the draft audit reports of management
discussion and analysis of financial condition and results of operation reports of
compliance with laws and risk management letters and letters of weakness in internal
controls issued to statutory and internal auditors appointment, removal and terms of
remuneration of the chief internal auditor.
Whistle Blower policy: This policy has to be communicated to all employees and
whistle blowers should be protected from unfair treatment and termination.
Subsidiary Companies: 50% non-executive directors and 1/3 and ½ Independent
directors depending on whether the chairman is non-executive or executive.
Certification reviewed: the necessary financial statements and directors report ;
established and maintained internal control, disclosed to the auditors and in-formed
the auditors and audit committee significant changes in internal control and or of
accounting policies during the year.
 OBJECTIVE OF CORPORATE GOVERNANCE:
The fundamental objective of corporate governance is to boost and maximize
shareholder value and protect the interest of other stake holders. World Bank
described Corporate Governance as blend of law, regulation and appropriate voluntary
private sector practices which enables the firm to attract financial and human capital
to perform efficiently, prepare itself by generating long term economic value for its
shareholders, while respecting the interests of stakeholders and society as a whole.
Corporate governance has various objectives to strengthen investor's confidence and
intern leads to fast growth and profits of companies. These are mentioned below:
1. A properly structured Board proficient of taking independent and objective
decisions is in place at the helm of affairs.
2. The Board accepts transparent procedures and practices and arrives at decisions
on the strength of adequate information.
3. The Board keeps the shareholders informed of relevant developments impacting
the company.
4. The Board remains in effective control of the affairs of the company all the time.

5. 5. The Board is balanced as regards the representation of suitable number of non-
executive and independent directors who will take care of the interests and well-
being of all the stakeholders.
6. The Board has an effective mechanism to understand the concerns of
stakeholders.
7. The Board effectively and regularly monitors the functioning of the management
team.
 FEATURES/CHARACTERISTICS OF CORPORATE GOVERNANCE
Corporate discipline is a commitment by a company’s senior management to adhere to
behavior that is universally recognized and accepted to be correct and proper. This
encompasses a company’s awareness of, and commitment to, the underlying
principles of good governance, particularly at senior management level.
1. Transparency
Transparency is the ease with which an outsider is able to make meaningful
analysis of a company’s actions, its economic fundamentals and the non-financial
aspects pertinent to that business. This is a measure of how good management is
at making necessary information available in a candid, accurate and timely
manner – not only the audit data but also general reports and press releases. It
reflects whether or not investors obtain a true picture of what is happening inside
the company.
2. Independence
Independence is the extent to which mechanisms have been put in place to
minimize or avoid potential conflicts of interest that may exist, such as
dominance by a strong chief executive or large share owner. These mechanisms
range from the composition of the board, to appointments to committees of the
board, and external parties such as the auditors. The decisions made, and internal
processes established, should be objective and not allow for undue influences.
3. Accountability
Individuals or groups in a company, who make decisions and take actions on
specific issues, need to be accountable for their decisions and actions.

6. Mechanisms must exist and be effective to allow for accountability. These
provide investors with the means to query and assess the actions of the board and
its committees.
4. Responsibility
With regard to management, responsibility pertains to behavior that allows for
corrective action and for penalizing mismanagement. Responsible management
would, when necessary, put in place what it would take to set the company on the
right path. While the board is accountable to the company, it must act
responsively to and with responsibility towards all stakeholders of the company.
5. Fairness
The systems that exist within the company must be balanced in taking into
account all those that have an interest in the company and its future. The rights of
various groups have to be acknowledged and respected. For example, minority
share owner interests must receive equal consideration to those of the dominant
share owner(s).
6. Social responsibility
A well-managed company will be aware of, and respond to, social issues, placing
a high priority on ethical standards. A good corporate citizen is increasingly seen
as one that is non-discriminatory, non-exploitative, and responsible with regard to
environmental and human rights issues. A company is likely to experience
indirect economic benefits such as improved productivity and corporate
reputation by taking those factors into consideration.
 ELEMENTS OF GOOD CORPORATE GOVERNANCE:
It has been established in various management reports that aspects of good corporate
governance comprise of transparency of corporate structures and operations, the
accountability of managers and the boards to shareholders, and corporate
responsibility towards stakeholders. While corporate governance basically lays down
the framework for creating long-term confidence between companies and the external
providers of capital.

7. There are numerous elements of corporate governance which are mentioned below:
1. Transparency in Board's processes and independence in the functioning of
Boards. The Board should provide effective leadership to the company and
management to realize sustained prosperity for all stakeholders. It should provide
independent judgment for achieving company's objectives.
2. Accountability to stakeholders with a view to serve the stakeholders and account
to them at regular intervals for actions taken, through strong and sustained
communication processes.
3. Impartiality to all stakeholders.
4. Social, regulatory and environmental concerns.
5. Clear and explicit legislation and regulations are fundamentals to effective
corporate governance.
6. Good management environment that includes setting up of clear objectives and
suitable ethical framework, establishing due processes, clear enunciation of
responsibility and accountability, sound business planning, establishing clear
boundaries for acceptable behaviour, establishing performance evaluation
measures.
7. Explicitly approved norms of ethical practices and code of conduct are
communicated to all the stakeholders, which should be clearly understood and
followed by each member of the organization.
8. The objectives of the corporation must be clearly recognized in a long-term
corporate strategy including an annual business plan along with achievable and
measurable performance targets and milestones.
9. A well composed Audit Committee to work as liaison with the management,
internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the Board on the
key issues.
10. Risk is an important component of corporate functioning and governance, which
should be clearly acknowledged, analysed for taking appropriate corrective
measures. In order to deal with such situation, Board should formulate a
mechanism for periodic reviews of internal and external risks.
11. A clear Whistle Blower Policy whereby the employees may without fear report to
the management about unprincipled behaviour, actual or suspected frauds or
violation of company's code of conduct. There should be some mechanism for

8. adequate safeguard to personnel against victimization that serves as whistle-
blowers.
 IMPORTANCE/ NEEDS/BENEFITS OF CORPORATE GOVERNANCE:
The Organisation for Economic Cooperation and Development (OECD) highlights the
significance of good corporate governance in the global and domestic economic
environment. According to OECD, if countries are to reap the full benefits of the
global capital market, and if they are to attract long-term “patient” capital, corporate
governance arrangements must be credible and well understood across borders. Even
if companies do not rely primarily on foreign sources of capital, adherence to good
corporate governance practices will help to improve the confidence of domestic
investors, may reduce the cost of capital, and ultimately induce more stable sources of
financing (Principles of Corporate Governance, 1990).
Corporate Governance is needed to create a corporate culture of Transparency,
accountability and disclosure. It refers to compliance with all the moral & ethical
values, legal framework and voluntary adopted practices. This enhances customer
satisfaction, shareholder value and wealth.
1. Corporate Performance: Improved governance structures and processes help
ensure quality decision-making, encourage effective succession planning for
senior management and enhance the long-term prosperity of companies,
independent of the type of company and its sources of finance. This can be
linked with improved corporate performance- either in terms of share price or
profitability.
2. Enhanced Investor Trust: Investors consider corporate Governance as
important as financial performance when evaluating companies for
investment. Investors who are provided with high levels of disclosure &
transparency are likely to invest openly in those companies.
3. Better Access to Global Market: Good corporate governance systems attracts
investment from global investors, which subsequently leads to greater
efficiencies in the financial sector.

9. 4. Combating Corruption: Companies that are transparent, and have sound
system that provide full disclosure of accounting and auditing procedures,
allow transparency in all business transactions, provide environment where
corruption will certainly fade out. Corporate Governance enables a
corporation to compete more efficiently and prevent fraud and malpractices
within the organization.
5. Enhancing Enterprise Valuation: Improved management accountability and
operational transparency fulfill investors’ expectations and confidence on
management and corporations, and return, increase the value of corporations.
6. Reduced Risk of Corporate Crisis and Scandals: Effective Corporate
Governance ensures efficient risk mitigation system in place. The transparent
and accountable system that Corporate Governance makes the Board of a
company aware of all the risks involved in particular strategy, thereby, placing
various control systems to monitor the related issues.
7. Accountability: Investor relations’ is essential part of good corporate
governance. Investors have directly/ indirectly entrusted management of the
company for the creating enhanced value for their investment. The company is
hence obliged to make timely disclosures on regular basis to all its
shareholders in order to maintain good investor’s relation. Good Corporate
Governance practices create the environment where Boards cannot ignore
their accountability to these stakeholders.
8. Encouraging positive behaviour: Having clearly delineated policies and
processes and a board of directors and executive managers who maintain the
compliance culture directly supports improved results, ensure clear lines of
communication with management and the rest of the organisation, and are
immediately responsive to any evidence that part of the organisation is not
participating.
9. Reducing the cost of capital: The implementation of good governance
practices can lead to a reduction in a company’s cost of capital. An

10. organisation that is seen to be stable, reliable and able to mitigate potential
risks will be able to borrow funds at a lower rate than those with weak
corporate governance.
10. Assuring internal controls: By implementing corporate governance correctly
across the organisation, the board may be certain that an adequate and
effective control environment is in effect, with the level of assurance
associated with each important component of governance. What’s more, the
board or the board committee is better positioned to take action when the
controls signal non-compliance.
11. Enabling better strategic planning: With more rapid access to information
and good communication with management, boards are able to formulate more
successful strategies. This includes more efficient allocation of resources and
capital.
12. Builds morale, reputation, and a legacy: Implementing procedures that
support good governance enhances a company’s identity where stakeholders
and potential investors are confident to place increased levels of trust in you,
which in turn allows you to develop stronger, longstanding relationships.
13. Increases success rate for financial performance and enhances
sustainability: Implementing protocol for good governance is intended to
assist with being able to quickly identify issues as well as to quickly make
decisions to resolve these potential issues thus reducing the eventuality of a
crisis and the cost it bears.
14. Creates a greater ability to attract and retain talent: A significant focus
has been placed on culture being a key contributing factor to the success of a
company. Maintaining transparency surrounding fairness, accountability and
operations, gives your employees a greater sense of responsibility and
awareness as to where they are positioned to create value within an
organisation.

11. 15. Creates an effective framework aimed at meeting business
objectives: Decision-making that takes into consideration major stakeholders
such as employees, suppliers and the community alike, has created a wider
vision for successful results.
16. Creates more opportunities to gain a competitive advantage: Every
industry is either constantly evolving or has the potential to evolve at a certain
point; adopting good governance and creating an environment where its
practices can be sustained is vital to ensuring that your organisation is
adaptable to change, thus providing a greater competitive advantage and
chance at survival.
17. Creates opportunities for investment: An organisation that represents
stability and reliability increases its chances of attracting premium investors,
as well as increasing their opportunity to borrow funds at a better rate.
18. Provides a practical way to guide decision-making at all levels: The ability
to make informed decisions can quickly improve performance and reduce the
effects of potential failures. One way to promote this kind of decision-making
ability is to ensure that information is readily available to key stakeholders,
i.e. a culture of transparency.
 IMPORTANT ISSUES IN CORPORATE GOVERNANCE:
There are number of important issues in corporate governance. All the issues are inter
related and interdependent to deal with each other. Each issues linked with corporate
governance have different priorities in each of the corporate bodies.
The issues are mentioned below:
1. Value based corporate culture
2. Holistic view
3. Compliance with laws
4. Disclosure, transparency, & accountability
5. Corporate governance and human resource management
6. Innovation

12. 7. Necessity of judicial reforms
8. Globalization helping Indian companies to become global giants based on good
corporate governance.
9. Lessons from Corporate failure
1. Value based corporate culture: For smooth operation of any firm, it is
necessary to develop certain ethics, values. Long run business needs to have value
based corporate culture. Value based corporate culture is good practice for
corporate governance. It is a set of ethics, principles which are inviolable.
2. Holistic view: This holistic view is religious outlook which helps for effective
operation of organization. It is not easier to adopt it, it needs special efforts and
once adopted it leads to developing qualities of nobility, tolerance and empathy.
3. Compliance with laws: Those companies which really need advancement, have
high ethical values and need to run long run business they abide and comply with
laws of Securities Exchange Board Of India (SEBI), Foreign Exchange
Regulation Act, Competition Act 2002, Cyber Laws, Banking Laws.
4. Disclosure, transparency, and accountability: Disclosure, transparency and
accountability are important feature for good governance. Timely and accurate
information should be disclosed on the matters like the financial position,
performance. Transparency is needed in order that government has faith in
corporate bodies. Transparency is needed towards corporate bodies so that due to
tremendous competition in the market place the customers having choices don't
shift to other corporate bodies.
5. Corporate Governance and Human Resource Management: In corporate
culture, employees are vital for success of firms. Every individual should be
treated with individual respect, his achievements should be recognized. Each
individual staff and employee should be given best opportunities to prove their
worth and these can be done by Human Resource Department. Thus in Corporate
Governance, Human Resource has a great role.

13. 6. Innovation: Every corporate body must involve in innovation practices i.e.
innovation in products, in services and it plays a critical role in corporate
governance.
7. Necessity of Judicial Reform: There is requirement of judicial reform for a good
economy and also in today's varying time of globalization and liberalization.
Judicial system of India though having performed salutary role all these years,
certainly are becoming obsolete and outdated over the years. The delay in
judiciary is due to several interests involved in it. But then with changing scenario
and fast growing competition, the judiciary needs to bring improvements
accordingly. It needs to promptly resolve disputes in cost effective manner.
8. Globalization helping Indian Companies to become global giants based on
good governance: In today's competitive environment and due to globalization,
several Indian Corporate bodies are becoming global companies which are
possible only due to good corporate governance.
9. Lessons from Corporate Failure: Corporate body have certain policies which if
goes as a failure they need to learn from it. Failure can be both internal as well as
external whatever it may be, in good governance, corporate bodies need to learn
from their failures and need to move to the path of success.
To summarize, corporate governance encompasses systems and procedures
designed to structure authority, balance responsibility and provide accountability
to stakeholders at all levels. Fundamentally, corporate governance is about
harmonising success with sustainability. Management literature have shown that
corporate Governance is a set of ideas, innovation, creativity, thinking having
certain ethics, values, principles which gives direction and shape to its people,
personnel and possessors of companies and help them to succeed in global
market.

14. CORPORATE GOVERNANCE AND AGENCY THEORY
 AGENCY THEORY- Agency theory is a principle that is used to explain and
resolve issues in the relationship between business principals and their agents. Most
commonly, that relationship is the one between shareholders, as principals, and
company executives, as agents.
 ROLE OF AGENCY THEORY IN CORPORATE GOVERNANCE
Agency theory is used to understand the relationships between agents and principals.
The agent represents the principal in a particular business transaction and is expected
to represent the best interests of the principal without regard for self-interest. The
different interests of principals and agents may become a source of conflict, as some
agents may not perfectly act in the principal's best interests. The resulting
miscommunication and disagreement may result in various problems and discord
within companies. Incompatible desires may drive a wedge between
each stakeholder and cause inefficiencies and financial losses. This leads to
the principal-agent problem.
The principal-agent problem occurs when the interests of a principal and agent come
into conflict. Companies should seek to minimize these situations through solid
corporate policy. These conflicts present normally ethical individuals with
opportunities for moral hazard. Incentives may be used to redirect the behavior of the
agent to realign these interests with the principal's concerns.
Corporate governance can be used to change the rules under which the agent operates
and restore the principal's interests. The principal, by employing the agent to represent
the principal's interests, must overcome a lack of information about the agent's
performance of the task. Agents must have incentives encouraging them to act in
unison with the principal's interests. Agency theory may be used to design these
incentives appropriately by considering what interests motivate the agent to act.
Incentives encouraging the wrong behavior must be removed, and rules discouraging
moral hazard must be in place. Understanding the mechanisms that create problems
helps businesses develop better corporate policy.To determine whether or not an agent
acts in their principal's best interest, the standard of "agency loss" has emerged as a

15. commonly used metric. Strictly defined, agency loss is the difference between the
optimal results for the principal and the consequences of the agent's behavior. For
example, when an agent routinely performs with the principal's best interest in mind,
agency loss is zero. But the further an agent's actions diverge from the principal's best
interests, the greater the agency loss becomes.
Agency loss drops when the following situations occur:
 The agent and principal hold similar interests and desire the same outcome.
 The principal is mindful of the agent's activities, so the principal has a keen
knowledge of the level of service they are receiving.
If neither of these events occurs, agency loss is likely to climb. Therefore, the chief
challenge involves persuading agents to prioritize their principal's best interest while
placing their self-interest second. If done correctly, the agent will nurture their
principal's wealth, while incidentally enriching their bottom lines.
 IMPORTANCE OF AGENCY THEORY
1. Different Risk Appetite: One of the major reasons for such strife is the levels of
risk appetite each is willing to undertake. Shareholders are mostly not involved in
the day-to-day working of the company and hence are not fully equipped to
understand the rationale behind critical business decisions. On the contrary,
managers are more far-sighted and have a far greater risk appetite due to their
close access to the relevant information. They believe in the going concern
concept of accounting and most of their decisions are taken keeping the long-term
view of the company in mind. While the shareholders are keen to increase the
current and future value of their holdings, the executives are more interested in
the long-term growth of the company. Thus, the differences in their approach
create a feeling of distrust and disharmony.
2. Super Self Centered Executives: The situation could be exactly opposite also
when the managers have interest in showing short-term performance to the
owners to get their pay hikes. This is more prevalent and a more dangerous
situation.
In a nutshell, there is a problem of goal congruence between the two parties. The

16. corporate governance policies, which aim at aligning the objectives of both the
principal and agents, are likely to resolve most agency conflicts. As we know that
there are no free lunches in this world, there are some agency costs also.
CONCLUSION
Agency theory in corporate finance is gaining momentum for all the right reasons.
With markets getting volatile as ever, it becomes imperative that both, the interests of
the shareholders and the company are taken care of. The shareholders should trust the
management of the company and go an extra mile to understand their day-to-day
business decisions. Similarly, the management should also keep the interests of the
true owners of the company in their mind. A clear communication should be sent out
explaining the rationale behind major business decisions to help shareholders
understand and appreciate changes if any. A robust corporate policy can help to keep
differences at bay.
REFORMING BOARD OF DIRECTORS
 BIRLA COMMITTEE
Securities and Exchange Board of India (SEBI) in 1999 set up a committee under Shri
Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of
good corporate governance.
The primary objective of the committee was to view corporate governance from the
perspective of the investors and shareholders and to prepare a ‘Code’ to suit the Indian
corporate environment.
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 is classified as mandatory.
 Others, which are either desirable or which may require change of laws be
classified as non-mandatory

17. Mandatory Recommendations
The mandatory recommendations apply to the listed companies with paid up
share capital of 3 crore and above.
1. Board of Directors: The Company agrees that 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 board of directors comprising of non
executive directors.
2. Audit committee: The company agrees that a qualified and independent audit
committee shall be set up and that shall have minimum three members, all being
non-executive directors, with the majority of them being independent and with at
least one director having financial and accounting knowledge.
3. Remuneration of Directors: The company agrees that the remuneration of non-
executive directors shall be decided by the board of directors. The company
further agrees that the following disclosures on the remuneration of directors shall
be made in the section on the corporate governance of the annual report.
4. Board Procedure: The Board should hold at least 4 meetings 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
5. Management :Management discussion and analysis report covering industry
structure, opportunities, threats, risks, outlook, internal control system should be
ready for external review
6. Shareholder: The company agrees that in case of the appointment of a new
director or re-appointment of a director the shareholders must be provided with
the information.
7. Report on Corporate Governance: Company agrees that there shall be a
separate section on Corporate Governance in the annual reports of company, with
a detailed compliance report on Corporate Governance.
8. Compliance: The company agrees that it shall obtain a certificate from the
auditors of the company regarding compliance of conditions of corporate

18. governance as stipulated in this clause. The same shall also be sent to the Stock
Exchanges along with the annual returns filed by the company.
Any Information should be shared with shareholders in regard to their
investments.
Non-Mandatory Recommendations
The committee made several recommendations with reference to:
1. Role of chairman: A non-executive Chairman should be entitled to maintain a
Chairman's office at the company's expense and also allowed reimbursement of
expenses incurred in the performance of his duties.
2. Remuneration committee of board: The board should 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.
3. Shareholders’ rights: The half-yearly declaration of financial performance
including summary of the significant events in last six-months, should be sent to
each household of shareholders.
4. Postal ballot: Although, the formality of holding the general meeting is gone
through, in actual practice only a small fraction of the shareholders of that
company do or can really participate therein. In this context, for shareholders who
are unable to attend the meetings, there should be a requirement which will
enable them to vote by postal ballot for key decisions. Like,
o Alteration in memorandum.
o Sale of whole or substantial part of the undertaking.
o Corporate restructuring.
o Further issue of capital.
o Venturing into new businesses.

19. o Matters relating to change in management.
o Variation in rights attached to class of securities.
These recommendations were to apply to all the listed private and public sector
companies, their directors, management, employees and professionals associated with
such companies. The Committee recognizes that compliance with the
recommendations would involve restructuring the existing boards of companies. It
also recognizes that smaller ones will have difficulty in immediately complying with
these conditions.
 NARESH CHANDRA COMMITTEE
In June 2011, government of India had announced setting up a high-powered task
force to review the defense management in the country and make suggestions for
implementation of major defense projects. The 14-member task force was headed by
Naresh Chandra, a former bureaucrat who has held top administrative jobs in the
Ministry of Defence and Prime Minister’s Office. The committee was formed
after a decade of the Kargil Review Committee and a Group of Ministers that
attempted the first major revamp of defence management in the country, during the
NDA Government. The Naresh Chandra Committee was to try to contemporaries the
KRC’s recommendations in view of the fact that 10 years have passed since the report
was submitted. It was also expected to examine why some of the crucial
recommendations relating to border management and restructuring the apex command
structure in the armed forces have not been implemented, especially in view of the
fact that the KRC had stated: “The political, bureaucratic, military and intelligence
establishments appear to have developed a vested interest in the status quo.” Naresh
Chandra Committee has submitted its final report on national security to the prime
minister in May 2012. The salient recommendations are as follows:
1. Disclosure of Contingent Liabilities: Management should give a clear description
in plain English of each material contingent liability and its risks, which should
be accompanied by the auditor's clearly worded comments on the management's
view.
2. Independent Standards of consulting and other entities that are affilated to Audit
Firm.

20. 3. Training of Independent Directors.
4. CFO/CFO Certificate: For all the listed companies, there should be a certification
by the CEO and CFO which should state that, to the best of their knowledge and
belief.
5. Independence of Audit Committee: All the members of the audit committee shall
be non executive directors.
6. Disqualification of Audit Assignments: The committee recommends an
abbreviated list of disqualifications for auditing.
7. They have reviewed the balance sheet and profit and loss account and all its
schedules and notes on accounts, as well as the cash statements and the Director's
Report.
8. Compulsory Audit Partner Rotation.
9. Management's Certification in the Event of Auditors Replacement.
10. Auditor's Annual Certificate of Independence.
11. Appointment of Auditors.
12. Setting up the Independent Quality Review Board.
13. Proposed Disciplinary Mechanism for Auditors.
14. Minimum Board Size of Listed Companies.
15. Tele-Conferencing and Video Conferencing.
ANALYSIS
The above recommendations of the Naresh Chandra Committee continue to echo the
group of minister’s (GoM) report that was prepared in 2002 during the NDA
government. Some of them were initiated at that time and some of them have
been discontinued by the UPA government.
The recommendation for a permanent Chairman of the Chiefs of Staff Committee is
the same as the creation of a Chief of Defence Staff recommended in 2002.
 The proposed National Intelligence Board also sounds like a repeat of
the Strategic Policy Group and the Intelligence Coordination Group that was set
up after the GoM’s report was accepted.
 Further, creation of a new post of Intelligence Advisor to assist the NSA seems to
be an absurd idea. One might ask whether the NSA was functioning without

21. intelligence input till now. There is absence of clarity on the inputs of NSA and
how the proposed NIB would work. There is no clear idea what would be the role
of the National Intelligence Board. In what sense it would be different from that
of the old Joint Intelligence Committee that was later transformed into the
National Security Council Secretariat.
 Moreover, the committee has made a recommendation that the Prevention of
Corruption Act should be amended to protect officers involved in defence
purchases, in case they make ‘an error of judgement’. This seems to be a
suggested way for corrupt officers to escape scrutiny in the guise of “error of
judgement”.
 NARAYANA MURTHY COMMITTEE
Corporate Governance initiatives in India began in 1998 with the Desirable Code of
Corporate Governance- a voluntary code published by the Committees on Corporate
Governance, and the first formal regulatory framework for listed companies
specifically for corporate governance, established by the SEBI. The latter was made in
February 2000, following the recommendations of the Kumarmangalam Birla
Committee Report.
The SEBI committee on Corporate Governance was constituted under the
Chairmanship of Shri N R Narayana Murthy, Chairman and Chief Mentor of Infosys
Technologies Limited.
The Committee met thrice on Dec 7, 2002, Jan 7, 2003 and Feb8, 2003, to
deliberate the issues related to corporate governance and finalize its recommendations
to SEBI.
SEBI Committee also recommend that the mandatory recommendations in the
report of the Naresh Chandra Committee, as they related to corporate governance, be
mandatorily implemented by SEBI through an amendment to clause 49 of the Lising
Agreement
The Committee on Corporate Governance, headed by Shri Narayanmurthy
was constituted by SEBI, to evaluate the existing corporate governance practices and
to improve these practices as the standards themselves were evolving with market
dynamics. The committee’s recommendations are based on the relative importance,

22. fairness, accountability, transparency, ease of implementation, verifiability and
enforceability related to audit committees, audit reports, independent directors, related
parties, risk management, directorships and director compensation, codes of conduct
and financial disclosures.
Mandatory Recommendations
1. Audit Committee: Audit committees of publicly listed companies should be
required to review the information mandatorily.
2. Financially Literate members of the audit committee- All audit committee
members should be "financially literate" and at least one member should have
accounting or related financial management proficiency.
3. Disclosure of accounting treatment : In case a company has followed a
treatment different from that prescribed in accounting standard, management
should justify why they believe such alternative treatment is more representative
of the underlying business transaction.
4. Related Party Transaction: A statement of all transactions with related parties
including their bases should be placed before the independent audit committee for
formal approval/ rectification.
5. 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.
6. Procedures for Initial Public Offerings: Companies raising money through an
IPO should disclose to the Audit Committee, the uses/application of funds by
major category on a quarterly basis. On annual basis, the company shall prepare a
statement of funds utilized for purposes other than those stated is the
offer/acceptance.

23. 7. 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.
8. Nominee directors: There shall be no nominee directors. Where an institution
wishes to appoint a director on the Board, such appointment should be made by
the shareholders.
9. 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 meetings.
10. Whistle Blower Policy: Personnel who observe an unethical or improper practice
should be able to approach the audit committee without necessarily informing
their supervisors. Companies shall take measures to ensure that this rights of
access is communicated to all employees through means of internal circulars etc.
The employment and other personnel policies of the company shall contain
provisions protecting "whistleblowers" from unfair termination and other
prejudicial employment practices.
11. Subsidiary Companies: The provisions relating to Board of Directors of the
holding company should be made applicable to the composition of the Board of
Directors of subsidiary companies.
Non Mandatory Recommendations
1. Audit Qualification: Companies should be encouraged to move towards a
regime of unqualified financial statements. This recommendation should be
reviewed at an appropriate juncture to determine whether the financial reporting
climate is conducive towards a system of filing only unqualified financial
statements.
2. Training of Board members: Companies should be encouraged to train their
board members in the business model of the company as well as the risk profile

24. of the business parameters of the company, their responsibilities as directors, and
the best ways to discharge them.
3. Evaluation of Board Performance: The performance evaluation of the non-
executive directors should be by a peer group comprising the entire Board of
Directors, excluding the director being evaluated, and Peer group evaluation
should be the mechanism to determine whether to extend/ continue the terms of
appointment of non-executive directors.
 CHANGES IN CORPORATE GOVERNANCE ISSUES AS PER NEW
COMPANIES ACT 2013
1. BOARD COMPOSITION
CA 2013 HAS introduced significant changes in the composition of the board of
directors of a company. The key changes introduced are set out below.
a. Minimum number of directors:
o Public company : 3
o Private company : 2
o One person company : 1
b. Maximum number of directors:
Every company shall have maximum 15 directors. A company can appoint more than
15 directors after passing a special resolution.
c. Resident Director:
Director resident in India ≥ 182 days. Every company is required to have at least one
director who has stayed in India for a total period of not less than 182 days in the
previous calendar year.
d. Independent Directors
Every listed public company is required to have at least one-third of total number of
directors as independent directors. The following public companies are required have
at least two directors as independent directors:
o Paid-up share capital ≥ Rs.10 crores

25. o Turnover ≥ Rs.100 crores
o Outstanding loans, debentures and deposits > Rs.50 crores as at the last date of
latest audited financial statements
e. Woman Director – One or more
The following class of companies are required to appoint at least one woman director
Every listed company. Every other public company that meets the following criteria
based on latest audited financial statements
o Paid–up share capital ≥ Rs.100 crores
o Turnover ≥ Rs.. 300 crores
o Companies to whom this provision applies, are required to comply as under:
o Every company existing as on or before 1st April 2014 within 1 year
o A company incorporated under Companies Act, 2013 within 6 months from
the date of incorporation
o Any intermittent vacancy of a Woman Director is required to be filled up by
the Board at the earliest but not later than immediate next board meeting or 3
months from the date of such vacancy, whichever is later.
f. Small Shareholders’ Director – one or more
o Every listed company may appoint a small share holders‟ director to be
elected by the small shareholders, i.e. shareholders holding shares of nominal
value of less than
Rs.20, 000 upon receiving notice of not less than 1,000 small shareholders or
one-tenth of the total number of such shareholders, whichever is lower or on a
voluntary basis.
2. COMMITTEES OF THE BOARD:
CA 2013 envisages four types of the committees to be constituted by the board:
a) AUDIT COMMITTEE:
o Minimum 3 directors with independent directors forming a majority.
o Majority of the members including Chairperson shall be persons with ability to
read and understand the financial statement.

26. o Minimum 3 directors with 2/3rd shall be independent directors. All the
members shall be financially literate and at least 1 member shall have
accounting or related financial management expertise.
o Chairman: Independent Director & present at AGM to answer shareholder
queries. The Company Secretary shall act as the secretary to the Committee.
b) NOMINATION AND REMUNERATION COMMITTEE
o 3 or more Non-Executive Directors out of which not less than ½ shall be
Independent Directors
o The Chairperson of the Company may be appointed as a member of the
Committee but shall not Chair such Committee
o At least 3 Non-Executive Directors.
o Chairman: Independent Director & present at AGM to answer shareholder
queries. However, it would be up to the Chairman to decide who should
answer the queries.
c) STAKEHOLDER RELATIONSHIP COMMITTEE
o Chairperson who shall be a Non-Executive Director and such other members
as may be decided by the Board.
o Chairmanship of a Non-Executive Director and such other members as may be
decided by the Board.
o Officer in default: punishable with imprisonment for a term which may extend
to 1 year or with fine which shall not be less than 25 thousand rupees but
which may extend to 1 lakh rupees or with both.
o Company: punishable with fine which shall not be less than 1 lakh rupees but
which may extend to 5 lakh rupees.
d) CSR COMMITTEE
o Clause 5 of Companies (Corporate Social Responsibility) Rules, 2014
provides that:
o The companies mentioned in the rule 3 shall constitute CSR Committee as
under.-
o An unlisted public company or a private company covered under sub-section
(1) of section 135 which is not required to appoint an independent director

27. pursuant to sub-section (4) of section 149 of the Act, shall have its CSR
Committee without such director.
o A private company having only two directors on its Board shall constitute its
CSR Committee with two such directors.
o With respect to a foreign company covered under these rules, the CSR
Committee shall comprise of at least two persons of which one person shall be
as specified under clause (d) of sub-section (1) of section 380 of the Act and
another person shall be nominated by the foreign company.
3. BOARD MEETINGS AND PROCESSES
The key change introduces by CA 2013 with respect to board meetings and processes
are as under:
o First Meeting: First Meeting of Board of Directors within 30 (Thirty) days
from the date of Incorporation of company.
o Subsequent Meetings: One person Company, Small company and Dormant
company:
 At least one meeting of Board of directors in each half of calendar
year. Minimum Gap B/W two meetings at least 90 days.
 Other than Companies mentioned above:
 Minimum No. of 4 meetings of Board of Director in a calendar year
Maximum Gap B/W two meetings should not be more the 120 days.
o Calling of Meeting: Meeting of Board of Director should be called by giving
7 days‟ notice to Directors at his registered address through:
 By hand delivery
 By post
 By Electronic means
o Quorum of Board Meeting:
 1/3 of total strength OR 2 (Two) Directors, whichever is higher.

28.  Where meeting of Board could not be held for want of quorum, the
meeting shall automatically adjourn to same time, same place at next
week (Not being national holiday).
 If number of directors reduced below quorum, then the remaining
directors may hold the meeting for the following purposes:
 To call a General meeting
 Increase the number of directors.
o Quorum in case of Interested Directors:
 If interested director exceed or equal to 2/3 of total strength the
remaining directors not being less than 2 (two) shall be the
quorum.
o Participation of Directors in Board Meetings: directors may, apart from
attending the meeting physically, participate in the meeting by way of video
conferencing & other audio visual means.