CHAPTER II

Factor influence the corporate governance

1. The ownership structure

2. The structure of company boards 3. The financial structure 4. The institutional environment

problems of corporate governance

Demand for information
Monitoring costs Supply of accounting information

 Supervisory board/committee/team Audit committee Internal audit Statutory audit Disclosure of information Risk management framework

Internal control framework

 Corporate Governance is concerned with holding the

balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interest of individuals, corporations and society.

The foundation of any structure of corporate governance is

disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust. -Sir Adrian Cadbury.

 Wider use of INDEPENDENT DIRECTOR Introduction of AUDIT COMMITTEE

Separation between CHAIRMAN and CEO

Adherence to detailed code of BEST PRACTICES.

 Protect rights of SHAREHOLDERS Recognize the rights of STAKEHOLDERS

Timely and accurate DISCLOSURE

Responsibility of the BOARD

The code provides a framework for efficient and transparent running of listed companies to enhance shareholder value. The regulators need to be vigilant to enforce the code in its true spirit.

Non Executive Director Qualification of a Director Tenure of Director Governance Policies of the Directors Information to Directors Orientation Courses CFO/ Co. Sec Corporate and Financial Reporting Audit Committees

 Encourage effective representation of independent non-executive

directors, including those representing minority interests. (through the use of proxy)

a. minority shareholders as a class are facilitated to contest.

b. At least one independent director representing institutional

equity interest of financial institution. (a director nominated as a director under section 182 and 183 not be taken as independent directors)

c. Executive directors not more than75% of the elected directors.

(Voluntary provision)
The directors to give consent that they are aware of their duties and

powers

Director, not to be a director in more than ten other listed companies.

ii. Director needs: a. to be registered as a National Tax Payer ; and

b. Not to a defaulter as convicted by court of a banking company, development financial institution, or a non-banking financial institution or as a member by the Stock Exchange.

iii Not to be director if spouse is engaged in the business of Stock Brokerage (voluntary) TENURE OF OFFICE OF DIRECTOR iv. Three years, vacancy to be filled in 30 days

Every listed company shall ensure

a. Statement of Ethics and Business practices is prepared b. Board of directors to adopt vision statement, and overall corporate strategy; formulate significant policies (for the purpose of risk management, marketing, etc.) c. Establish internal control d. Documentation by resolutions passed in meetings on all serious issues. i.e. investment and dis-investment of funds, loans, write-off of bad debts etc.

e. Appointment etc. of Chief Executive to be determined by the

board.
f. Investment policy of modaraba institution to be approved and reported in annual report.

Significant issues to be placed for decision by the board of directors (i.e. annual business plan, budgets, joint ventures etc.)

Orientation courses for directors.

CFO has to be: a. professional accountant ; or b. graduate with 5 yrs experience in handling financial affairs in a listed company or a bank. CS has to be: a. professional accountant ; or b. member of a recognized body of corporate/chartered secretaries or c. lawyer ; or d. a graduate with 5 yrs experience of handling corporate affairs.

CORPORATE AND FINANCIAL REPORTING FRAMEWORK Directors report to shareholders. Give complete and candid position of the company.

i. ii.

RESPONSIBILITY FOR FINANCIAL REPORTING Financial statements to be duly endorsed by CEO and CFO Secretarial compliance certificate required with annual returns

DISCLOSURE OF INTEREST BY A DIRECTOR.

AUDITORS NOT TO HOLD SHARES

External Auditors and their spouse restricted to purchase shares in the company they are auditing.

AUDIT COMMITTEE
i.

not less than three member committee preferably from nonexecutive directors.

ii. Committee to meet at least once every quarter. iii. CFO to attend meetings of Audit committee.

SEBI and Clause 49

SEBI asked Indian firms above a certain size to implement Clause 49, a regulation that strengthens the role of independent directors serving on corporate boards. On August 26, 2003, SEBI announced an amended Clause 49 of the listing agreement which every public company listed on an Indian stock exchange is required to sign. The amended clauses come into immediate effect for companies seeking a new listing.
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The major changes to Clause 49

1.Independent Directors 1/3 to depending whether the chairman of the board is a non-executive or executive position.

2.Non-Executive Directors ----The total term of office of non-executive directors is now limited to three terms of three years each.

3.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.

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Clause 49..
4.Audit Committee----Financial statements and the draft audit report of management discussion and analysis of Financial condition Result of operations of compliance with laws Risk management letters Letters of weaknesses in internal controls issued by statutory Internal auditors Removal and terms of remuneration of the chief internal auditor
5.Whistleblower Policy ----This policy has to be communicated to all employees and whistleblowers should be protected from unfair treatment and termination. 6.Subsidiary Companies-----50% non-executive directors & 1/3 & independent directors depending on whether the chairman is nonexecutive or executive. 18

7.Disclosures----Contingent liabilities./Basis of related party transactions. /Risk management/ . Proceeds from initial public offering/ . Remuneration of directors. 8.Certifications -> reviewed the necessary financial statements and directorsreport; established and maintained internal controls, disclosed to the auditors and informed the auditors and audit committee of any significant changes in internal control and/or of accounting policies during the year.

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Mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition

Board must meet at least four times a year, with a maximum time gap of four months between two successive meetings. If the chairman of the Company is a non-executive then one-third of the board should consist of independent directors, and 50% otherwise. Independent defined as those directors who, apart from receiving directors remuneration do not have any other monetary relationship or transactions with the company, its promoters, management or subsidiaries, which in the view of the board may affect independence of judgment.

Mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition

The frequency of board meetings and board committee meetings, with their dates, must be fully disclosed to shareholders in the annual report of the company.

The attendance record of all directors in board meetings and board committee meetings must be fully disclosed to shareholders in the annual report of the company.
Full and detailed remuneration of each director (salary, sitting fees, commissions, stock options and perquisites) must be fully disclosed to shareholders in the annual report of the company. Loans given to executive directors are capped (no loans permitted to non-executives), and must be fully disclosed to shareholders in the annual report of the company.

Mandated CG guidelines and disclosures

Board of Directors: information that must be supplied

Annual, quarter, half year operating plans, budgets and updates. Quarterly results of company and its business segments. Minutes of the audit committee and other board committees.

Recruitment and remuneration of senior officers.

Materially important legal notices and claims, as well as any accidents, hazards, pollution issues and labor problems. Any actual or expected default in financial obligations. Details of joint ventures and collaborations.

Transactions involving payment towards goodwill, brand equity and intellectual property.
Any materially significant sale of business and investments. Foreign currency and other risks and risk management. Any regulatory non-compliance.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee

Audit Committee is mandatory.

Must have minimum of three members, all non-executive directors, the majority of whom are independent. Chairman must be an independent director, and must be present at the annual shareholders meeting to answer audit or finance related questions. At least one member must be an expert in finance/accounts. Must have at least three meetings per year, including one before finalisation of annual accounts. Must meet with statutory auditors and internal auditors; have the powers to seek any financial, legal or operational information from the management; obtain outside legal or professional advice.

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

Oversight of the companys financial reporting process to ensure that the financial statement is correct, sufficient and credible Appointment / removal of external auditor and fixing of audit fees Reviewing with management the annual financial statements before submission to the board, focusing on: Changes in accounting policies and practices Major accounting entries Qualifications in draft audit report Significant adjustments arising out of audit The going concern assumption Compliance with accounting standards, with stock exchange and legal requirements Any related party transactions

Mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

Adequacy of internal audit and internal control systems, through discussion with internal and statutory auditors as well as management. Significant findings, follow-up and action taken reports. Discussion with internal and statutory auditors about scope and design of audits. Reviewing financial and legal risks and companys risk management policies. Examining reasons behind any materially significant default to creditors, bond-holders, suppliers and shareholders.

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

Board composition (executive, non-exec, independent). Qualifications and experience of directors. Number of outside directorships held by each director (capped at director not being a member of more than 10 board-level committees, and Chairman of not more than 5). Attendance record of directors. Remuneration of directors. Relationship (familial or pecuniary) with other directors.

Warning against insider trading, with procedures to prevent such acts.

Details of grievances of shareholders, and how quickly these were addressed. Date, time and venue of annual general meeting of shareholders.

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash flow statement

Dates of book closure and dividend payment. Details of shareholding pattern. Name, address and contact details of registrars and/or share transfer agents.

Details about the share transfer system.

Stock price data over the reporting year, and how the companys stock measured up to the index. Financial effects of stock options.

Financial effects of any share buyback.

Financial effects of any warrants that are to be exercised. Chapter reporting corporate governance practices

Mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and
cash flow statement

Detailed chapter on Management Discussion and Analysis focusing on markets, operations, finances, accounts, risks, opportunities and threats, internal control systems. Consolidated financial statement, incorporating accounts of all subsidiaries (over 50% shares held by reporting company). Details of all significant related party transactions. Detailed segment reporting (revenues, costs, operating profits and capital employed). Deferred tax liabilities and assets and debit/credit in the P&L for the reporting year

Disclosures
(A) Basis of related party transactions
I.

II.

III.

A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee. Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee. Details of material individual transactions with related parties or others, which are not on an arms length basis should be placed before the audit committee, together with Managements justification for the same

Disclosures
(B) Disclosure of Accounting Treatment To disclose in the financial statements, if an accounting treatment other than prescribed in Accounting Standard has been followed alongwith explanation.

(C)

Board Disclosures management

Risk

Internal and external business risks Procedures to inform Board members about the risk assessment and minimization. Periodically reviewed

Disclosures
(D) Proceeds from public issues, rights issues, preferential issues etc. To disclose to the Audit Committee, on use/application of funds as and when any issue is made (E) Additional disclosures: In the Annual Report the criteria of making payments to NEDs to be disclosed or a reference to be made that the same is available on the companys website number of shares and convertible instruments held by NEDs. NEDs shall disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the company in which they are proposed to be appointed as directors, prior to their appointment.

Disclosures
F) Management A Management Discussion and Analysis report to form part of the Annual Report. G) Shareholders Disclosures to shareholders in case of appointment /reappointment of directors, quarterly results and presentations made, shareholders grievance committee and share transfer committee, shareholding pattern-change

CEO/CFO certification
The CEO, i.e. Managing Director and the CFO i.e. whole-time Finance Director or head of the finance function to certify to the Board that: (a) They have reviewed financial statements and the cash flow statement for the year and these statements:
(i) do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading; (ii) together present a true and fair view of the companys affairs and are in compliance with existing accounting standards, applicable laws and regulations.

(b) no transactions entered into by the company during the year which are fraudulent, illegal or violative of the companys code of conduct.

CEO/CFO certification (contd)

(c)They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. (d)They have indicated to the auditors and the Audit committee
(i) Significant changes in internal control during the year; (ii) Significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements; and (iii)Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a