CG

CORPORATE GOVERNANCE
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INTRODUCTION TO CORPORATE GOVERNANCE:
Corporate governance (CG) is a set of process, custom, policies,
laws, institution affecting the way of corporation is directed administered or control. CG also
include the relationship among many stakeholder involved and the goal for which corporation
is governed. the principle stakeholders are shareholder, board of directors, employee,
customers, creditors, suppliers and the community at large.
CG is a multi- faceted subject. It aims at ensuring accountability
of certain individuals in an organisation. Through mechanisms that try to reduce or eliminate
the principle agent problem. Corporate governance is a set of system, principles and
processes which ensure that the company is governed in the best interest of all stakeholder.it
is a system by which companies are directed and controlled. It is about promoting corporate
fairness, transparency and accountability. In other Good corporate governance is simply
good business
In the words of MR. NR Murthy, corporate governance is a
mechanisms which enable different group to contribute capital labour and skills for pursuing
their own interest. The individual who invest in corporation avails an opportunity to take his
portion of profit of business without participating in the company opration the management
of the company runs the business on behalf of shareholder.
Even though the corporate is an individual entity it is associated
with different constituets. The direction of corporation is influenced by individual
relationship. there has been renewed interest in CG practices of Modern Corporation since
2001 particularly due to high profile collapses of number of large US firms such as Enron
corporation MCI


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DEFITITION OF CG:
1. According to gabrielie O`Donavan , a business author:
CG is an internal system encompassing
policies, processes and people which serve the needs of stakeholder & shareholder by
directing & controlling management activities with good business survey, activity,
accountability. Integrity

2. According to SEBI:
CG is acceptance by management of inalienable right of
shareholder as the true owner of the corporation and their own role as a trustee on
behalf of shareholder. It is about commitment to values, about ethical business
conduct & about making a distinction between personal& corporate funds in the
management of company.

3. According to sir Adrian Cadbury:
CG is concern with holding the balance between
economic and social goals & between individual and communal goals the CG role is
to encourage the efficient use of resources and equally to require accountability for
the stewerd ship of those resources the aim is to align as nearly as possible the interest
of individual. Corporation and society.

4. According To Kumar Manglam Committee Report:
We always have striven hard for
respectability, transparency and to create ethical organisation. There are certain
expectation that we haven`t fulfilled. But were also young organisation and areas
like track record of management, wemy be low because we `re yet to show
longevity.

5. According to international chamber of commerce:
CG is the relationship between corporate
managers, directors, and the provider of capital people and institution who save and
invest their capital to earn returns. It ensures that the board of directors are accountable
for the pursuit of corporate objective that the corporation itself confirms to the low &
regulation.


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HISTORY OF CORPORATE GOVERNANCE IN INDIA:
The history of the development of Indian corporate laws has been marked by interesting
contrasts. At independence, India inherited one of the worlds poorest economies but one
which had a factory sector accounting for a tenth of the national product; four functioning
stock markets with clearly defined rules governing listing, trading and settlements; a well-
developed equity culture if only among the urban rich; and a banking system replete with
well-developed lending norms and recovery procedures
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. In terms of corporate laws and
financial system,
therefore, India emerged far better endowed than most other colonies.

The years since liberalization, have witnessed wide-ranging changes in both laws and
regulations driving corporate governance as well as general consciousness about it. Perhaps
the single most important development in the field of corporate governance and investor
protection in India has been the establishment of the Securities and Exchange Board of India
(SEBI) in 1992 and its gradual empowerment since then
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.
Established primarily to regulate and monitor stock trading, it has played a crucial role in
establishing the basic minimum ground rules of corporate conduct in the country.
Concerns about corporate governance in India were, however, largely triggered by a spate of
crises in the early 90s the Harshad Mehta stock market scam of 1992 followed by incidents
of companies allotting preferential shares to their promoters at deeply discounted prices as
well as those of companies simply disappearing with investors money.
Corporate governance in India is evident from the various legal and regulatory frameworks
and Committees set relating to corporate functioning comprising of the following
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:
1. The Companies Act, 1956

2. Monopolies and Restrictive Trade Practices Act, 1969 (replaced by new Competition Law)

3. Foreign Exchange Management Act, 2000

4. Securities and Exchange Board of India Act, 1992


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5. Securities Contract Regulation Act, 1956

6. The Depositories Act, 1996

7. Arbitration and Conciliation Act, 1996

8. SEBI Code on Corporate Governance

Apart from these Acts many committees have been set up over the years to legislate the
concept called corporate governance.
1) Desirable Code of Corporate Governance (1998)

Corporate governance has been a buzzword in India since 1998. On account of the interest
generated by Cadbury Committee Report (1992) in UK corporate governance initiatives in
India began in 1998 with the Desirable Code of Corporate Governance a voluntary code
published by the Confederation of Indian Industry (CII), and the first formal regulatory
framework for listed companies specifically for corporate governance, established by the
SEBI
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. The CII Code on corporate governance recommended that the key information to be
reported, listed companies to have audit committees, corporate to give a statement on value
addition, consolidation of accounts to be optional. Main emphasis was on transparency.
2) Committee on Corporate Governance under the Chairmanship of Shri Kumar
Mangalam Birla (1999).

The Kumar Mangalam Committee made mandatory and nonmandatory recommendations.
Based on the recommendations of the Committee, the SEBI had specified principles of
Corporate Governance and introduced a new clause 49 in the Listing agreement of the Stock
Exchanges in the year 2000.


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3) Naresh Chandra Committee (2002)

The Enron debacle in July 2002, involving the hand-in-glove relationship between the auditor
and the corporate client and various other scams in the United States, and the consequent
enactment of the stringent Sarbanes Oxley Act in the United States were some important
factors, which led the Indian government to wake up. The Department of Company Affairs in
the Ministry of Finance on 21 August 2002, appointed a high level committee, popularly
known as the Naresh Chandra Committee, to examine various corporate governance issues
and to recommend changes in the diverse areas involving the auditorclient relationships and
the role of independent directors.

The Committee submitted its Report on 23 December 2002. Naresh Chandra Committee
recommendations relate to the Auditor-Company relationship and the role of Auditors.
Report of the SEBI Committee on Corporate Governance recommended that the mandatory
recommendations on matters of disclosure of contingent liabilities, CEO/CFO Certification,
definition of Independent Director, independence of Audit Committee and independent
director exemptions in the report of the Naresh Chandra Committee, relating to corporate
governance, be implemented by SEBI.
4) Committee on Corporate Governance under the Chairmanship of Shri N. R.
Narayana Murthy (2002)

Narayana Murthy Committee recommendations to clause 49 of the Listing Agreement,
include role of Audit Committee, Related party transactions, Risk management,
compensation to Non-Executive Directors, Whistle Blower Policy, Affairs of Subsidiary
Companies, Analyst Reports and other non mandatory recommendations.


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CORPORATE GOVERNANCE UNDER CLAUSE 49 OF THE LISTING
AGREEMENT

Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a
listed entity should follow, was first introduced in the financial year 2000-01 based on
recommendations of Kumar Mangalam Birla committee. After these recommendations were
in place for about two years, SEBI, in order to evaluate the adequacy of the existing practices
and to further improve the existing practices set up a committee under the Chairmanship of
Mr Narayana Murthy during 2002-03.
The Murthy committee, after holding three meetings, had submitted the draft
recommendations on corporate governance norms
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. After deliberations, SEBI accepted the
recommendations in August 2003 and asked the Stock Exchanges to revise Clause 49 of the
Listing Agreement based on Murthy committee recommendations. This led to widespread
protests and representations from the Industry thereby forcing the Murthy committee to meet
again to consider the objections. The committee, thereafter, considerably revised the earlier
recommendations and the same was put up on SEBI website on 15th December 2003 for
public comments. It was only on 29th October 2004 that SEBI finally announced revised
Clause 49, which had to be implemented by the end of financial year 2004- 05. These revised
recommendations have also considerably diluted the original Murthy Committee
recommendations.
Areas where major changes were made include:

1. Independence of Directors

2. Whistle Blower policy

3. Performance evaluation of nonexecutive directors

4. Mandatory training of non-executive directors, etc.
Failure to comply with clause 49 (corporate governance) of SEBIs listing agreement is
punishable with imprisonment of up to 10 years or a fine of up to Rs 25 crore or both.

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Besides, stock exchanges can suspend the dealing/trading of securities. With over 6000 listed
companies, monitoring and enforcement are significant challenges in the immediate term.
While SEBIs ultimate sanction in cases of serial non-compliance is delisting, this is
unpopular as delisting penalises the non-controlling dispersed shareholders and closes their
exit options. Hence, SEBI has tended to enforce the recommendations through dialog and in
some cases monetary penalties
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.
Corporate Governance under Companies Act, 1956

The Companies Act, 1956 is the central legislation in India that empowers the Central
Government to regulate the formation, financing, functioning and winding up of companies.
It applies to whole of India and to all types of companies
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.
The Companies Act, 1956 has elaborate provisions relating to the Governance of Companies,
which deals with management and administration of companies. It contains special provisions
with respect to the accounts and audit, directors remuneration, other financial and
nonfinancial disclosures, corporate democracy, prevention of mismanagement, etc.
(1) Disclosures on Remuneration of Directors

The specific disclosures on the remuneration of directors regarding all elements of
remuneration package of all the directors should be made as a part of Corporate Governance.
Section 299 of the Act requires every director of a company to make disclosure, at the Board
meeting, of the nature of his concern or interest in a contract or arrangement (present or
proposed) entered by or on behalf of the company
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. The company is also required to record
such transactions in the Register of Contract under section 301 of the Act.
(2) Requirements of the Audit Committee

Audit Committee has a critical role to play in ensuring the integrity of financial management
of the company. This Committee add assurance to the shareholders that the auditors, who act
on their behalf, are in a position to safeguard their interests. Besides the requirements of
Clause 49, section 292A of the Act requires every public having paid up capital of Rs 5
crores or more shall constitute a committee of the board to be known as Audit Committee
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.

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As per the Act, the committee shall consist of at least three directors; two-third of the total
strength shall be directors other than managing or whole time directors. The Annual Report
of the company shall disclose the composition of the Audit Committee
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.
If the default is made in complying with the said provision of the Act, then the company and
every officer in default shall be punishable with imprisonment for a term extending to a year
or with fine up to Rs 50000 or both.
(3) Number of Directorships Restricted

Sections 275, 276 and 277 have been amended to provide that no person shall hold office as
director in more than 15 companies (excluding private company, unlimited company, etc., as
defined in section 278) instead of 20 companies. This shall enable the director concerned to
devote more time to the affairs of company in which he is a director
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.
(4) Corporate Democracy

Wider participation by the shareholders in the decision making process is a pre-condition for
democratizing corporate bodies. Due to geographical distance or other practical problems, a
substantially large number of shareholders cannot attend the general meetings. To overcome
these obstacles and pave way for introduction of real corporate democracy, section 192A of
the Act and the Companies (Passing of Resolution by Postal allot), Rules provides for certain
resolutions to be approved and passed by the shareholders through postal ballots.
(5) Appointment of Nominee Director by Small Shareholders

Section 252 has been amended to provide that a public company having paid-up capital of Rs.
5 crore or more and one thousand or more small shareholders can elect a director by small
shareholders. Small shareholders means a shareholder holding shares of nominal value of
Rs. 20,000 or less in a company
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. However, this provision is not mandatory and small
shareholders have option to elect a person as their representative for appointment as director
on the Board of such company.


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(6) Directors Responsibility Statement

Sub-section (2AA) in section 217A has provided that the Boards report shall include a
directors responsibility statement with respect to applicable accounting standards having
been followed, consistent application of accounting policies selected so as to give a true and
fair view of state of affairs and of the profit and loss of the company, maintenance of
adequate accounting records with proper care for safeguarding assets of company and to
prevent and detect fraud and other irregularities, and the preparation of annual accounts on a
going concern basis.


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CHARACTERSTICKS OF CG:
1. Discipline
Corporate discipline is a commitment by a companys senior management to adhere to
behavior that is universally recognized and accepted to be correct and proper. This
encompasses a companys awareness of, and commitment to, the underlying principles
of good governance, particularly at senior management level.
All involved parties will have a commitment to adhere to procedures, processes, and
authority structures established by the organization.
2. Transparency
Transparency is the ease with which an outsider is able to make meaningful analysis of a
companys 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.

All actions implemented and their decision support will be available for inspection by
authorized organization and provider parties.
3. 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.

All processes, decision-making, and mechanisms used will be established so as to
minimize or avoid potential conflicts of interest.
4. 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. Mechanisms must exist

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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.

Identifiable groups within the organization - e.g., governance boards who take actions
or make decisions - are authorized and accountable for their actions.
5. 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.

Each contracted party is required to act responsibly to the organization and its
stakeholders.
6. 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).

All decisions taken, processes used, and their implementation will not be allowed to
create unfair advantage to any one particular party.
7. 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.


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OBJECTIVE OF CORPORATE GOVERNANCE:
Corporate Governance may be defined as a set of systems, processes and principles which
ensure that a company is governed in the best interest of all stakeholders. It is the system by
which companies are directed and controlled. It is about promoting corporate fairness,
transparency and accountability. In other words, 'good corporate governance' is simply
'good business'. It ensures:
Adequate disclosures and effective decision making to achieve corporate objectives;
Transparency in business transactions;
Statutory and legal compliances;
Protection of shareholder interests;
Commitment to values and ethical conduct of business.
In other words, corporate governance is the acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their own role as trustees
on behalf of the shareholders. It deals with conducting the affairs of a company such that
there is fairness to all stakeholders and that its actions benefit the greatest number of
stakeholders. In this regard, the management needs to prevent asymmetry of benefits
between various sections of shareholders, especially between the owner-managers and the
rest of the shareholders.
It is about commitment to values, about ethical business conduct and about making a
distinction between personal and corporate funds in the management of a company. Ethical
dilemmas arise from conflicting interests of the parties involved. In this regard, managers
make decisions based on a set of principles influenced by the values, context and culture of
the organization. Ethical leadership is good for business as the organization is seen to
conduct its business in line with the expectations of all stakeholders.
The aim of "Good Corporate Governance" is to ensure commitment of the board in
managing the company in a transparent manner for maximizing long-term value of the
company for its shareholders and all other partners. It integrates all the participants involved
in a process, which is economic, and at the same time social.


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The fundamental objective of corporate governance is to enhance shareholders' value and
protect the interests of other stakeholders by improving the corporate performance and
accountability. Hence it harmonizes the need for a company to strike a balance at all times
between the need to enhance shareholders' wealth whilst not in any way being detrimental
to the interests of the other stakeholders in the company. Further, its objective is to generate
an environment of trust and confidence amongst those having competing and conflicting
interests.
It is integral to the very existence of a company and strengthens investor's confidence by
ensuring company's commitment to higher growth and profits. Broadly, it seeks to achieve
the following objectives:
A properly structured board capable of taking independent and objective decisions is
in place at the helm of affairs;
The board is balance as regards the representation of adequate number of non-
executive and independent directors who will take care of their interests and well-
being of all the stakeholders;
The board adopts transparent procedures and practices and arrives at decisions on
the strength of adequate information;
The board has an effective machinery to subserve the concerns of stakeholders;
The board keeps the shareholders informed of relevant developments impacting the
company;
The board effectively and regularly monitors the functioning of the management
team;
The board remains in effective control of the affairs of the company at all times.
The overall endeavour of the board should be to take the organisation forward so as
to maximize long term value and shareholders' wealth.


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PRINCIPLES OF CG:
Accountability
The Code of Corporate Governance envisages accountability of the Board of Directors of the
Company before all shareholders in accordance with the legislation in force, and is the governing
document for the Board of Directors in issues related to strategy planning, administration and
control over the Companys executive bodies.

Fairness
The Company undertakes to protect the rights of its shareholders and treat all shareholders on an
equal basis. The Board of Directors enables its shareholders to receive efficient protection if their
rights are violated.

Transparency
The Company shall provide timely disclosure of credible information on all the important facts
related to its activities, including information on its financial condition, social and environmental
measures, results of activities, ownership and management structures; the Company shall provide
free access to such information for all interested parties.

Responsibility
The Company acknowledges the rights of all interested parties envisaged by the legislation in force,
and aims at cooperation with such parties in order to provide steady development and ensure
financial stability of the Company.
Leadership
An effective board should head each company. The Board should steer the company to meet its
business purpose in both the short and long term.
Capability
The Board should have an appropriate mix of skills, experience and independence to enable its
members to discharge their duties and responsibilities effectively.


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Sustainability
The Board should guide the business to create value and allocate it fairly and sustainably to
reinvestment and distributions to stakeholders, including shareholders, directors, employees and
customers.
Integrity
The Board should lead the company to conduct its business in a fair and transparent manner that
can withstand scrutiny by stakeholders.
We kept them short, with purpose, but we also kept them aspirational. None of them should be a
surprise they might be just like you have on your board. Well, why not share and exchange our
ideas - the more we debate, the better we remember the principles which guide our own behaviour.


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LEGAL FRAMEWORK
An effective regulatory and legal framework is indispensable for the proper and sustained
growth of the company. In rapidly changing national and global business environment, it
has become necessary that regulation of corporate entities is in tune with the emerging
economic trends, encourage good corporate governance and enable protection of the
interests of the investors and other stakeholders. Further, due to continuous increase in the
complexities of business operation, the forms of corporate organizations are constantly
changing. As a result, there is a need for the law to take into account the requirements of
different kinds of companies that may exist and seek to provide common principles to
which all kinds of companies may refer while devising their corporate governance
structure.
The important legislations for regulating the entire corporate structure and for dealing with
various aspects of governance in companies are Companies Act, 1956 and Companies Bill,
2004. These laws have been introduced and amended, from time to time, to bring more
transparency and accountability in the provisions of corporate governance. That is,
corporate laws have been simplified so that they are amenable to clear interpretation and
provide a framework that would facilitate faster economic growth.
Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board
of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and
Exchange Board of India (SEBI), with a view to protect the interests of investors in the
securities markets as well as to maintain the standards of corporate governance in the
country.
In india the corporate governance have following legal approaches:
Companies act 1956
SEBI


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COMPANIES LAWS

The MINISTRY OF CORPORATION is the main authority for regulating and promoting
efficient, transparent and accountable form of corporate governance in the Indian corporate
sector. It is constantly working towards improvement in the legislative framework and
administrative set up, so as to enable easy incorporation and exit of the companies, as well
as convenient compliance of regulations with transparency and accountability in corporate
governance. It is primarily concerned with administration of the Companies Act, 1956 and
related legislations.
1. The companes act,1956 is the central legislation in India that empowers the Central
Government to regulate the formation, financing, functioning and winding up of
companies. It applies to whole of India and to all types of companies, whether registered
under this Act or an earlier Act. It provides for the powers and responsibilities of the
directors and managers, raising of capital, holding of company meetings, maintenance and
audit of company accounts, powers of inspection, etc. That is, it empowers the Central
Government to inspect the books of accounts of a company, to direct special audit, to order
investigation into the affairs of a company and to launch prosecution for violation of the
Act. These inspections are designed to find out whether the companies conduct their affairs
in accordance with the provisions of the Act, whether any unfair practices prejudicial to the
public interest are being resorted to by any company or a group of companies and to
examine whether there is any mismanagement which may adversely affect any interest of
the shareholders, creditors, employees and others.
The main objectives with which this Act has been introduced are to:- (i) help in the
development of companies on healthy lines; (ii) maintain a minimum standard of good
behaviour and business honesty in company promotion and management; (iii) protect the
interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of
the affairs of companies in their annual published balance sheet and profit and loss
accounts; (v) ensure proper standard of accounting and auditing; (vi) provide fair
remuneration to management and Board of Directors as well as to company's employees;
etc.
The Companies Act, 1956 has elaborate provisions relating to the Governance of

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Companies, which deals with management and administration of companies. It contains
special provisions with respect to the accounts and audit, directors remuneration, other
financial and non-financial disclosures, corporate democracy, prevention of
mismanagement, etc.
Every company shall in each year, hold in addition to any other meetings, a general
meeting as its annual general meeting and shall specify the meeting as such in the notices
calling it; and not more than fifteen months shall elapse between the date of one annual
general meeting of a company and that of the next. At each annual general meeting, every
company shall appoint an auditor or auditors to hold office from the conclusion of that
meeting until the conclusion of the next annual general meeting and shall, within seven
days of the appointment, give intimation thereof to every auditor so appointed.
Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company or
elsewhere, and shall be entitled to require from the officers of the company such
information and explanations as the auditor may think necessary for the performance of his
duties as auditor.
The auditor shall inquire:- (i) whether loans and advances made by the company on the
basis of security have been properly secured and whether the terms on which they have
been made are not prejudicial to the interests of the company or its members; (ii) whether
transactions of the company which are represented merely by book entries are not
prejudicial to the interests of the company; etc.
In the case of every company, a meeting of its Board of directors shall be held at least once
in every three months and at least four such meetings shall be held in every year. Every
director of a company who is in any way, whether directly or indirectly, concerned or
interested in a contract or arrangement, or proposed contract or arrangement, entered into
or to be entered into, by or on behalf of the company, shall disclose the nature of his
concern or interest at a meeting of the Board of directors.
No director of a company shall, as a director, take any part in the discussion of, or vote on,
any contract or arrangement entered into, or to be entered into, by or on behalf of the
company, if he is in any way, whether directly or indirectly, concerned or interested in the

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contract or arrangement; nor shall his presence count for the purpose of forming a quorum
at the time of any such discussion or vote; and if he does vote, his vote shall be void.
Every company shall keep one or more registers in which shall be entered separately
particulars of all contracts or arrangements, including the following particulars to the
extent they are applicable in each case, namely:- (i) the date of the contract or arrangement;
(ii) the names of the parties thereto; (iii) the principal terms and conditions thereof; (iv) in
the case of a contract or arrangement to which this Act applies, the date on which it was
placed before the Board; (v) the names of the directors voting for and against the contract
or arrangement and the names of those remaining neutral. Further, every company shall
keep at its registered office a register of its directors, managing director, managing agent,
secretaries and treasurers, manager and secretary.
The remuneration payable to the directors of a company, including any managing or
whole-time director, shall be determined, either by the articles of the company, or by a
resolution or, if the articles so require, by a special resolution, passed by the company in
general meeting; and the remuneration payable to any such director determined as
aforesaid shall be inclusive of the remuneration payable to such director for services
rendered by him in any other capacity. However, any remuneration for services rendered
by any such director in any other capacity shall not be so included if:- (i) the services
rendered are of a professional nature; and (ii) in the opinion of the Central Government, the
director possesses the requisite qualifications for the practice of the profession.
A director may receive remuneration by way of a fee for each meeting of the Board, or a
committee thereof, attended by him. A director who is neither in the whole-time
employment of the company nor a managing director may be paid remuneration, either by
way of a monthly, quarterly or annual payment with the approval of the Central
Government; or by way of commission if the company by special resolution authorises
such payment. However, the remuneration paid to such director, or where there is more
than one such director, to all of them together, shall not exceed:- (i) one per cent of the net
profits of the company, if the company has a managing or whole-time director, a managing
agent or secretaries and treasurers or a manager; (ii) three per cent of the net profits of the
company, in any other case.
Every public company having paid-up capital of not less than five crores of rupees shall

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constitute a committee of the Board knows as 'Audit Committee' which shall consist of not
less than three directors and such number of other directors as the Board may determine of
which two thirds of the total number of members shall be directors, other than managing or
whole-time directors. The annual report of the company shall disclose the composition of
the Audit Committee. The auditors, the internal auditor, if any, and the director-in-charge
of finance shall attend and participate at meetings of the Audit Committee but shall not
have the right to vote.
The Audit Committee should have discussions with the auditors periodically about internal
control systems, the scope of audit including the observations of the auditors and review
the half-yearly and annual financial statements before submission to the Board and also
ensure compliance of internal control systems. It shall have authority to investigate into
any matter in relation to the items specified by the Board and for this purpose, shall have
full access to information contained in the records of the company and external
professional advice, if necessary. The recommendations of the Audit Committee on any
matter relating to financial management, including the audit report, shall be binding on the
Board. If the Board does not accept the recommendations of the Audit Committee, it shall
record the reasons thereof and communicate such reasons to the shareholders.
Besides, a listed public company may, and in the case of resolutions relating to such
business as the Central Government may, by notification, declare to be conducted only by
postal ballot, shall, get any resolution passed by means of a postal ballot, instead of
transacting the business in general meeting of the company. Where a company decides to
pass any resolution by resorting to postal ballot, it shall send a notice to all the
shareholders, along with a draft resolution explaining the reasons thereof, and requesting
them to send their assent or dissent in writing on a postal ballot within a period of thirty
days from the date of posting of the letter. If a resolution is assented to by a requisite
majority of the shareholders by means of postal ballot, it shall be deemed to have been duly
passed at a general meeting convened in that behalf. However, if a shareholder sends his
assent or dissent in writing on a postal ballot and thereafter any person fraudulently defaces
or destroys the ballot paper or declaration of identify of the shareholder, such person shall
be punishable with imprisonment for a term which may extend to six months or with fine
or with both.

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2. In the competitive and technology driven business environment, while corporates require
greater autonomy of operation and opportunity for self-regulation with optimum
compliance costs, there is a need to bring about transparency through better disclosures and
greater responsibility on the part of corporate owners and management for improved
compliance. In response to such changing corporate climate, the Companies Act, 1956 has
been amended from time to time so as to provide more transparency in corporate
governance and protect the interests of small investors, depositors and debenture holders,
etc.
The important step in this direction has been the companies bill 2004, which has been
introduced to provide the comprehensive review of the company law. It contained
important provisions relating to corporate governance, like, independence of auditors,
relationship of auditors with the management of company, independent directors with a
view to improve the corporate governance practices in the corporate sector. It is subjected
to greater flexibility and self-regulation by companies, better financial and non-financial
disclosures, more efficient enforcement of law, etc.
This amendment to the Companies Act 1956 mainly focused on reforming the audit
process and the board of directors. It mainly aimed at:- (i) laying down the process of
appointment and qualification of auditors, (ii) prohibiting non-audit services by the
auditors; (iii) prescribing compulsory rotation, at least of the Audit Partner; (iv) requiring
certification of annual audited accounts by both CEO and CFO; etc. For reforming the
boards, the bill included that remuneration of non-executive directors can be fixed only by
shareholders and must be disclosed. A limit on the amount which can be paid would also
be laid down. It is also envisaged that the directors should be imparted suitable training.
However, among others, an independent director should not have substantial pecuniary
interest in the companys shares.


22

CORPORATE GOVERNANCE : SEBI`S LOW:
An improved corporate governance is the key objective of the regulatory framework in the
securities market. Accordingly, sebi has made several efforts with a view to evaluate the
adequacy of existing corporate governance practices in the country and further improve
these practices. It is implementing and maintaining the standards of corporate governance
through the use of its legal and regulatory framework, namely:-
1.securities contract(regulation) act,1956:
This Act was enacted to prevent undesirable transactions and to check speculation in the
securities by regulating the business of dealing therein. Any stock exchange, which is
desirous of being recognised, may make an application in the prescribed manner to the
Central Government. Every application shall contain such particulars as may be prescribed,
and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation
and control of contracts as well as a copy of the rules relating in general to the constitution
of the stock exchange, and in particular to:- (i) the governing body of such stock exchange,
its constitution and powers of management and the manner in which its business is to be
transacted; (ii) the powers and duties of the office bearers of the stock exchange; (iii) the
admission into the stock exchange of various classes of members, the qualifications for
membership, and the exclusion, suspension, expulsion and re-admission of members there
from or there into; (iv) the procedure for the registration of partnerships as members of the
stock exchange, in cases where the rules provide for such membership; and the nomination
and appointment of authorised representatives and clerks.
Every recognised stock exchange shall furnish the Central Government with a copy of the
annual report, and such annual report shall contain such particulars as may be prescribed. It
may make rules or amend any rules made by it to provide for all or any of the following
matters, namely:- (i) the restriction of voting rights to members only in respect of any
matter placed before the stock exchange at any meeting; (ii) the regulation of voting rights
in respect of any matter placed before the stock exchange at any meeting so that each
member may be entitled to have one vote only, irrespective of his share of the paid-up
equity capital of the stock exchange; (iii) the restriction on the right of a member to appoint
another person as his proxy to attend and vote at a meeting of the stock exchange; etc.

23
If, in the opinion of the Central Government, an emergency has arisen and for the purpose
of meeting the emergency, the Central Government considers it expedient so to do, it may,
by notification in the Official Gazette, for reasons to be set out therein, direct a recognised
stock exchange to suspend such of its business for such period not exceeding seven days
and subject to such conditions as may be specified in the notification, and, if, in the opinion
of the Central Government, the interest of the trade or the public interest requires that the
period should be extended, it may, by like notification extend the said period from time to
time.
Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in order to
further amend the Securities Contracts (Regulation) Act, 1956, with a view to include
securitisation instruments under the definition of 'securities' and provide for disclosure
based regulation for issue of the securitised instruments and the procedure thereof. This has
been done keeping in view that there is considerable potential in the securities market for
the certificates or instruments under securitisation transactions. Further, replication of the
securities markets framework for these instruments would facilitate trading on stock
exchanges and, in turn, help development of the market in terms of depth and liquidity.
2.SEBI act,1992
This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith
or incidental thereto. For this purpose, the SEBI (the Board), by regulation, specify:- (i) the
matters relating to issue of capital, transfer of securities and other matters incidental thereto;
and (b) the manner in which such matters shall be disclosed by the companies.
No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed,
registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser
and such other intermediary who may be associated with securities market shall buy, sell or
deal in securities except under, and in accordance with, the conditions of a certificate of
registration obtained from the Board in accordance with the regulations made under this
Act.
No depository, participant, custodian of securities, foreign institutional investor, credit
rating agency, or any other intermediary associated with the securities market as the Board

24
may by notification in this behalf specify, shall buy or sell or deal in securities except under
and in accordance with the conditions of a certificate of registration obtained from the
Board in accordance with the regulations made under this Act.
Further, no person shall sponsor or cause to be sponsored or carry on or caused to be carried
on any venture capital funds or collective investment scheme including mutual funds, unless
he obtains a certificate of registration from the Board in accordance with the regulations.
Every application for registration shall be in such manner and on payment of such fees as
may be determined by regulations. The Board may, by order, suspend or cancel a certificate
of registration in a prescribed manner, as may be determined by regulations under this Act.
However, no order shall be made unless the person concerned has been given a reasonable
opportunity of being heard.
3.Depositories act,1996
This Act was enacted to provide for regulation of depositories in securities and for matters
connected therewith or incidental thereto. It provides for the introduction of scripless
trading system and settlement, which is considered necessary for the effective functioning
of the securities markets. As per the Act, the term 'depository' means "a company formed
and registered under the Companies Act, 1956 and which has been granted a certificate of
registration under sub-section (1A) of section 12 of the Securities and Exchange Board of
India Act, 1992".
No depository shall act as a depository unless it obtains a certificate of commencement of
business from the Board (the SEBI). The Board shall grant a certificate only if it is satisfied
that the depository has adequate systems and safeguards to prevent manipulation of records
and transactions. However, a certificate shall not be refused unless the depository concerned
has been given a reasonable opportunity of being heard.
A depository shall enter into an agreement with one or more participants as its agent, in
such form as may be specified by the bye-laws. Any person, through a participant, may
enter into an agreement, in such form as may be specified by the bye-laws, with any
depository for availing its services. Any such person shall surrender the certificate of
security, for which he seeks to avail the services of a depository, to the issuer in such

25
manner as may be specified by the regulations. The issuer, on receipt of certificate of
security, shall cancel the certificate of security and substitute in its records the name of the
depository as a registered owner in respect of that security and inform the depository
accordingly. A depository shall, on receipt of information, enter the name of the person
referred in its records, as the beneficial owner.
On receipt of intimation from a participant, every depository shall register the transfer of
security in the name of the transferee. If a beneficial owner or a transferee of any security
seeks to have custody of such security, the depository shall inform the issuer accordingly.
Every person subscribing to securities offered by an issuer shall have the option either to
receive the security certificates or hold securities with a depository. Where a person opts to
hold a security with a depository, the issuer shall intimate such depository the details of
allotment of the security, and on receipt of such information the depository shall enter in its
records the name of the allottee as the beneficial owner of that security.
A depository shall be deemed to be the registered owner for the purposes of effecting
transfer of ownership of security on behalf of a beneficial owner. However, it shall not have
any voting rights or any other rights in respect of securities held by it. The beneficial owner
shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect
of his securities held by a depository.
The Board, on being satisfied that it is necessary in the public interest or in the interest of
investors so to do, may, by order in writing,:- (i) call upon any issuer, depository,
participant or beneficial owner to furnish in writing such information relating to the
securities held in a depository as it may require; or (ii) authorise any person to make an
enquiry or inspection in relation to the affairs of the issuer, beneficial owner, depository or
participant, who shall submit a report of such enquiry or inspection to it within such period
as may be specified in the order.


26
BENEFITS OF CORPORATE GOVERNANCE
Corporate governance is often associated with public companies, but small businesses can
also benefit from this practice. Corporate governance consists of rules that direct the roles
and actions of key people rather than processes. Unlike simple policies and procedures, such
as a dress code or expense reimbursement procedure, corporate governance rules focus on
creating better management and fewer ethical or legal problems. Examples of corporate
governance include setting rules for using business funds for personal use; serving on a board
of directors; hiring family members; conflicts of interest; notifying owners, investors and
partners of key meetings and decisions; and disbursing profits.
Improved Reputation
A corporate governance program can boost your company's reputation. If you publicize your
corporate governance policies and detail how they work, more stakeholders will be willing to
work with you. This can include lenders who see you have strong fiscal policies and internal
controls, charities you might partner with to promote your business, government agencies,
employees, the media, vendors and suppliers. The practice of sharing internal information
with key stakeholders is known as transparency, which allows people to feel more confident
you have little or nothing to hide.
Fewer Fines, Penalties, Lawsuits
Corporate governance includes instituting policies that require the company to take specific
steps to stay compliant with local, state and federal rules, regulations and laws. For example,
as part of corporate governance, an executive management team or board of directors might
conduct a review of the companys hiring practices if it falls under the guidelines of the Equal
Opportunity Employment Commission. You might require that your accounting department
undergo an external audit by an independent auditor every quarter or year.
Decreased Conflicts and Fraud
Corporate governance limits the potential for bad behavior of employees by instituting rules
to reduce potential fraud and conflict of interest. For example, the company might draft a
conflict of interest statement that top executives must sign, requiring them to disclose and
avoid potential conflicts, such as awarding contracts to family members or contracts in which
an executive has an ownership interest. The company might forbid loans to officers and
family members or the hiring of family members. External audits or requiring checks over a
certain amount to be approved and signed by two people help reduce errors and fraud.

27
LIMITATIONS OF CG
Corporate governance is one of the law's most intensely regulated fields. This is because
corporations are privately owned but are treated as independent legal entities, rendering their
assets vulnerable to a variety of potential abuses. Corporate governance is generally governed
by state law, although the federal government has also enacted legislation to curb abuses.
Ownership-Management Separation
The officers and directors who run the day-to-day affairs of a corporation and make most of
its policy decisions are not necessarily shareholders. This can become a problem in large,
publicly traded corporations. If no hareholder holds a controlling interest in the corporation,
and most shareholders vote by proxy, the corporation's assets are controlled by the board of
directors and the officers. The separation of ownership and management can lead to a conflict
of interest between management's duty to maximize shareholder value and its interest in
maximizing its own income. A CEO, for example, might be paid a large bonus even as the
corporation approaches bankruptcy.
Illegal Insider Trading
The term "corporate insiders" refers to corporate officers, directors and employees because
they may have access to confidential, non-public information about the corporation that
might affect the value of its shares. Corporate insiders are not strictly prohibited from trading
corporate shares but must report these trades to the Securities and Exchange Commission.
Illegal insider trading occurs when a shareholder, while in possession of confidential
information relevant to the future value of his shares, sells shares to a buyer without access to
this information. Illegal insider trading can also be committed by a shareholder not directly
affiliated with the corporation, such as an outside auditor, a government regulator or a
relative of a corporate insider. Because access to confidential corporate information can be
widely dispersed, laws against insider trading can be difficult to enforce.
Misleading Financial Statements
There are many ways to present factually accurate information on a financial statement in a
manner that is misleading to investors -- by, for example, selling property from a parent
company to a subsidiary to maximize parent company revenues. It is also possible to present
factually incorrect information that is difficult to detect by establishing complex networks of
subsidiaries and cross-shareholdings.

28
Costs of Regulation
The abuse of corporate governance has triggered the enactment of a large body of state and
federal laws designed to prevent such abuses from recurring. Compliance with these laws can
be burdensome and expensive for corporations. For example, the Securities and Exchange
Act of 1933 requires companies seeking to list on a stock exchange to make such extensive
disclosures to potential investors that compliance can cost hundreds of thousands of dollars.
More recently, the Sarbanes-Oxley Act of 2002 requires corporations to establish extensive
systems of internal controls to ensure that their financial statements are both factually
accurate and non-misleading.


29
ISSUES IN CG:
Issues in Corporate Governance
Major issues in corporate governance reports have included the role of board, the
quality of financial reporting and auditing, directors remuneration, risk management and
corporate social responsibility. In order to clear the above statement I need to expand on these
issues in later articles but for now lets examine the major areas that have been affected by
the corporate governance.
Duties of Directors
The corporate governance reports have aimed to build on the directors duties as
defined in statutory and case law duties of directors. These include the fiduciary duties to act
in the best interests of the company, use their powers for a purpose, avoid conflicts of interest
and exercise a duty of care.
Composition and Balance of the Board
A feature of many corporate governance scandals has been boards dominated by a
single senior executive or small cabinet of kitchen with other member of board who are
working just as a robot toy. It is possible that a single person may bypass the board directions
to meet his own personal interests. The report on the UK Guinness case suggested that the
Earnest Saunders chief executive paid himself a reward of 3million without the consent of
other directors.
In the case where the organization is not dominated by a single person, there may be
other problem in the composition of board of directors. The organization may be run by a
minority group revolve around CEO or CFO and recruitment and appointments may be done
by personal recommendations rather than formal system. So in order to run a smooth business
a board must be balanced in sense of talents, skills, and competence from numerous
specialisms related to the organizations situation and also in terms of age (in order to ensure
that senior directors are bringing on newer ones to assist in the planning of succession).


30
Remuneration and Reward of Directors
Directors being paid excessive bonuses and salaries have been identified as significant
corporate abuses for a large number of years. It is, however, unavoidable that the corporate
governance codes have been targeted this significant issue.

Reliability of Financial Reporting and External Auditors
Financial reporting and auditing issue are seen more critical to corporate governance
by the investors because of their main consideration in ensuring management accountability.
It is the reason that they have been must debated and the focus of serious litigation. Whilst
considering the corporate governance debate only on reporting and accounting issues is
insufficient, the greater regulation of practices such as off-balance sheet financing has
directed to greater transparency and a reduction in risks faced by investors.
The necessary questioning may not be carried out by external auditor from senior
management because the auditors may have threat of loosing audit assignment. In the same
way internal auditor may not ask an alien question to senior member because their
employment matters are determined by the CFO. But generally the external auditors become
the reason of corporate collapse, for instance in the case of Barlow Clowes that was poorly
focused and planned audit failed to determine the illegal usage of monies from clients.
Boards Responsibility for Risk Management and Internal Control
If the board does not arrange the regular meetings in order to consider the
organizational activities systematically show that the board is not meeting their
responsibilities. But this thing also occurred sometime when the board is not provided by full
information to properly oversight on business activities. All this mess results in the poor
system that may unable to report and measure the risks associated with business.
Shareholders Rights and Responsibilities
Shareholders role and rights is subject of particular importance. They should be
informed about all those information that are material to them because these information may
influence their amount of investment. They should also be given the right to vote on policies
affecting the governance of organization.

31
Corporate Social Responsibility and Business Ethics
The lack of mutual decision and sense of responsibility for businesses and
stakeholders has unavoidably turned out the business ethics and social responsibility a
significant part of corporate governance debate.


32

MODELS OF CORPORATE GOVERNANCE :
The following are some of the models of corporate governance :
Anglo-American model :
This model is also called an Anglo-Saxon model and is used as basis of
corporate governance in U.S.A, U.K, Canada, Australia, and some common wealth countries.
The shareholders appoint directors who in turn appoint the managers to manage the business.
Thus there is separation of ownership and control. The board usually consist of executive
directors and few independent directors. The board often has limited ownership stakes in the
company. Moreover, a single individual holds both the position of CEO and chairman of the
board. This system (model) relies on effective communication between shareholders, board
and management with all important decisions taken after getting approval of shareholders (by
voting).


33

German model :
This is also called as 2 tier board model as there are 2 boards viz. The
supervisory board and the management board. It is used in countries like Germany, Holland,
France, etc. Usually a large majority of shareholders are banks and financial institutions. The
shareholder can appoint only 50% of members to constitute the supervisory board. The rest is
appointed by employees and labour unions. .

The supervisory board appoints and monitors the management board. There is a reporting
relationship between both the boards although the management board independently conducts
the day-to-day operations of the company. One important feature is that the labor relations
director is represented on the management board. Therefore, the governance mechanisms
have imbibed workers participation. German banks can own corporate stock unlike the U.S.
banks. Although the German Universal Banks as group cast 54 to 64 percent of the votes in
1992 without absolute majority there is no evidence that they had acted as effective
institutional monitors on behalf of the shareholders.


34
Japanese model :
This model is also called as the business network model, usually shareholders
are banks/financial institutions, large family shareholders, corporate with cross-shareholding.
There is supervisory board which is made up of board of directors and a president, who are
jointly appointed by shareholder and banks/financial institutions. This is rejection of the
Japanese keiretsu- a form of cultural relationship among family controlled corporate and
groups of complex interlocking business relationship, where cross shareholding is common
most of the directors are heads of different divisions of the company. Outside director or
independent directors are rarely found of the board.

Although shareholders own the company, the financing bank has a crucial role. The
executive management, which steps into the shoes of the board of directors, performs the
management function. In fact, the financing bank provides even the managerial personnel
and monitors the management function. It also has powers to supersede the board when it
becomes expedient or in a state of emergency.


35

Indian model :
The model of corporate governances found in India is a mix of the Anglo-
American and German models. This is because in India, there are three types of Corporation
viz. private companies, public companies and public sectors undertakings (which includes
statutory companies, government companies, banks and other kinds of financial institutions).
Each of these corporation have a distinct pattern of shareholding. For e.g. In case of
companies, the promoter and his family have almost complete control over the company.
They depend less on outside equity capital. Hence in private companies the German model of
corporate governance is followed.

The pattern of private companies is mostly that of closely held or dominated by a founder, his
family, and associates. The role of external equity finance is small; the business is financed
by retained earnings and heavily by debt (Tata group, Reliance group, Birla group etc.).
In respect of public enterprises, the board is formed by the central/state government and even
where divestiture has taken place, hold of the government continues to be dominant. Here,
the issues concerning protection of stakeholders generally take a back seat. Large
corporations are, therefore, often run more in the interest of the government than in the
interest of efficiency and maximization of aggregate shareholder wealth.


36
CONCLUSION
With the recent spate of corporate scandals and the subsequent interest in corporate
governance, a plethora of corporate governance norms and standards have sprouted around
the globe. After the Satyam Scandal, corporate governance, which is the system that helps
firms control and direct operations, is in the spotlight as key parts of the governance
framework such as audit and finance functions have failed to check the promoter-driven
agendas.
Corporate governance extends beyond corporate law. Its objective is not mere fulfillment of
legal requirements but ensuring commitment on managing transparentcy for maximising
shareholder values. As competition increases, technology pronounces the deal of distance and
speeds up communication, environment also changes. In this dynamic environment, the
systems of Corporate Governance also need to evolve, upgrade in time with the rapidly
changing economic and industrial climate of the country.
Corporate Governance has become the latest buzzword today. Almost every country has
institutionalized a set of Corporate Governance codes, spelt out best practices and has sought
to impose appropriate board structures. Despite the Corporate Governance revolution there
exists no universal benchmark for effective levels of disclosure and transparency. There are
several corporate governance structures available in the developed world but there is no one
structure, which can be singled out as being better than the others. There is no one size fits
all structure for corporate governance. Corporate governance extends beyond corporate law.
Its fundamental objective is not the mere fulfillment of the requirements of law but in
ensuring commitment of the board in managing the company in a transparent manner for
maximizing long term shareholder value. Effectiveness of corporate governance system
cannot merely be legislated by law. As competition increases, technology pronounces the
death of distance and speeds up communication. The environment in which companies
operate in India also changes. In this dynamic environment the systems of corporate
governance also need to evolve. The recommendations made by different expert committees
will go a long way in raising the standards of corporate governance in Indian companies and
make them attractive destinations for local and global capital. These recommendations will
also form the base for further evolution of the structure of corporate governance in
consonance with the rapidly changing economic and industrial environment of the country in
the new millennium.

37
BIBLOGRAPHY
Book
1. Investor Protection and Corporate Governance: Firm-level-Alberto
Chong, Florencio Lopez-de-Silanes
2. Business ethics and corporate governance - archana prabhu desai
3. Corporate Governance - Robert A. G. Monks, Nell Minow

Websites:
1. www.google.com
2. www.wikipidia.com
3. www.sebi.com
4. www.ask.com

Articles:
kumar manglam Birla committee report on CG
Naresh Chandra Committee (2002)
Report on Corporate Governance under the Chairmanship of Shri N. R. Narayana Murthy
(2002)

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