The Securities and Exchange Board of India (SEBI) had set up a Committee under the Chairmanship of Kumar Mangalam Birla to promote and raise standards of corporate governance. The Report of the committee was the first formal and comprehensive attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets at that time.
The recommendations of the Report, led to inclusion of Clause 49 in the Listing Agreeme nt in the year 2000.
These recommendations, aimed at improving the standards of Corporate Governance, are divided into mandatory and non- mandatory recommendations. The said recommendations have been made applicable to all listed companies with the paid-up capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more at any time in the history of the company. The ultimate responsibility for putting the recommendations into practice lies directly with the Board of Directors and the management of the company.
A summary of the Report is reproduced hereunder:
• The Board should have an optimum combination of Executive and Non Executive Directors with not less than 50 per cent of the Board consisting of non-executive directors.
In the case of Non-executive Chairman, at least one-third of the Board should consist of independent directors and in the case of an executive Chairman, at least half of the Board should consist of independent directors. The committee agreed on the following definition of independence:
"Independent directors are directors who apart from receiving director's remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect
their independence of judgment."
• Board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings. A director should not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director.
• Financial Institutions should appoint nominee directors on a selective basis and nominee director should have the same responsibility, be subject to the same discipline and be accountable to the shareholders in the same manner as any other director of the company
• Non-executive Chairman should be entitled to maintain Chairman's office at the expense of the company and also allowed reimbursement of expenses incurred in performance of his duties.
• Audit Committee - which a qualified and independent audit committee should be set up by the board of a company
• The audit committee should have minimum three members, all being non-executive
directors, with the majority being independent, and with at least one director havi the chairman of the committee should be an independent director;
• The chairman should be present at Annual General Meeting to answer shareholder queries;
• The audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the committee but on occasions it may also meet without the presence of any executives of the company. Finance director and head of internal audit and when required, a representative of the external auditor should be present as invitees for the meetings of the audit committee;
• The Company Secretary should act as the secretary to the committee.
•Frequency of Meeting
• The audit committee should meet at least thrice a year. One meeting must be held before finalization of annual accounts and one necessarily every six months.
• The quorum should be either two members or one-third of the members of the audit
committee, whichever is higher and there should be a minimum of two independent directors.
•Powers of Audit Committee
• To investigate any activity within its terms of reference.
• To seek information from any employee.
• To obtain outside legal or other professional advice.
• To secure attendance of outsiders with relevant expertise, if it considers necessary.
•Functions of the Audit Committee
• Oversight of the company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
• Recommending the appointment and removal of external auditor, fixation of audit fee and
also approval for payment for any other services.
• Reviewing with management the annual financial state ments before submission to the board, focusing primarily on:
Remuneration Committee should comprise of at least three directors, all of whom should be non- executive directors, the chairman of committee being an independent director. All the members of the remuneration committee should be present at the meeting. These recommendations are non mandatory.
The board of directors should decide the remuneration of non-executive directors. The Corporate Governance section of the Annual Report should make disclosures about remuneration paid to Directors in all forms including salary, benefits, bonuses, stock options, pension and other fixed as well as performance linked incentives.
• Shareholders/Investors' Grievance Committee of Directors - The Board should set up a
Committee to specifically look into share holder issues including share transfers and redressal of shareholders' complaints.
• General Body Meetings - Details of last three AGMs should be furnished
• Disclosures - Details of non-compliance by the company including penalties and strictures imposed by the Stock Exchanges, SEBI or any statutory authority on any matter related to capital
markets during the last three years must be disclosed to the shareholders.
• Means of communication - Half- yearly report to be sent to each household of shareholders,
details of the mode of dissemination of quarterly results and presentations made to institutional investors to be disclosed and statement of Management Discussion and Analysis to be included in the report.
• General shareholder information - Various specified matters of interest to be included in the Annual Report.
• Auditor's Certificate on Corporate Governance - There should be an Auditor's certificate on corporate governance in the Annual Report as an annexure to the Director's Report.
Companies should consolidated accounts in respect of all subsidiaries in which they hold 51 per cent or more of the capital.
• Information like quarterly results, presentation made by companies to analysts may be put on company's web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site.
• Shareholders to use the forum of General Body Meetings for ensuring that the company is being properly stewarded for maximizing the interests of the shareholders.
• A board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of
balance sheet, non-receipt of declared dividends etc.
• Half- yearly declaration of financial performance including summary of the significant events in last six- months, should be sent to each household of shareholders.
The institutional s hareholders should:
Take active interest in the composition of the Board of Directors Be vigilant Maintain regular and systematic contact at senior level for exchange of views on management, strategy, performance and the quality of management. Ensure that voting intentions are translated into practice. Evaluate the corporate governance performance of the company.
TYPES OF BOARD
The unitary board, remains in full control of every aspect of the company's activities. It initiates action and it is responsible for ensuring that the action which it has initiated is carried out. All the directors, whether executive or outside, share same aims and responsibilities and are on the same platform.
Two-tie r Boards
The alternative board model to unitary board is the two-tier board, which was developed in its present form in Germany.
A two-tier board fulfils the same basic functions as a unitary board, but it does so through a clear separation between the tasks of monitoring and that of management. The supervisory board (Asfusichtsrat) oversees the direction of the business and the management board (Vorstand) is responsible for the running of the company. The supervisory board controls the management board through appointing its members and through its statutory right to have the final say in major decisions affecting the company. The structure rigorously separates the control function from the management function and members of the one board cannot be members of the other. This separation is enshrined in law and the legal responsibilities of the two sets of board members are different.
The supervisory board system was introduced to strengthen the control of shareholders, particularly the banks, over the companies in which they had invested. Shareholdings are more concentrated in Germany and most quoted companies have at least one major shareholder, often a family or another company. Banks play an important part in governance as investors, lenders and through the votes of individual shareholders for which they hold proxies. They are, therefore, well represented on supervisory boards.