Corporate Governance Rating

Corporate Governance (CG)

It is a set of processes, customs, policies, laws, and institutions

affecting the way a corporation is directed, administered and controlled.

Principal stakeholders which are affected by CG are the shareholders,

management,board of directors, employees, customers, creditors, suppliers, regulators, and the community at large.

About Reliance
Dhirubhai H. Ambani (1932-2002) Reliance Industries Limited, is a Fortune Global 500 company and is

the largest private sector company in India.

Enjoys global leadership in its businesses.
Shares are listed in both BSE and NSE. Major Group Companies are Reliance Industries Limited and Reliance

Industrial Infrastructure Limited

Businesses
Capital

Entertainm ent

Communicati on

Businesses

Health

Power

Infrastructur e

GMI
Governance Metrics International (GMI) is an independent ratings

agency formed in April 2000 which has designed a rating system that creates a metric to compare companies corporate governance characteristics.
GMI starts the rating process by developing a governance profile

incorporating hundreds of variables per company plus analysts insights.

Rating criteria
Financial Disclosure and Internal Controls Market for Control Shareholder Rights Board Accountability Executive Compensation Corporate Behavior

Red Flags
GMI issues red flags whenever there is a significant governance issue

or other issue of concern that might potentially affect shareholder value.

While flags may be attached to one or more research categories,

companies with three or more flags are rare.

Red flags are assigned when GMI publishes its scheduled quarterly rating releases, and in between the scheduled releases, on an as needed basis.

Interpret GMI Rating

Scored on a scale of 1.0 (lowest) to 10.0 (highest). Companies in the same region or country of origin (the company's 'home

market' rating) or to the approximately 4,200 companies rated by GMI worldwide ('global rating'). Thus, a company may have high overall ratings in its home market but fare less well on a global basis
GMI Rating

Status

9.0 or above 8.5 7.5 7.0 6.0 5.5 3.5 3.0 or less

well above average Above average Average Below average well below average

Financial disclosure and Internal Controls

Internal Parameter

Criteria 1
Currently under formal investigation for accounting Irregularities

Justification
The financial statements have been prepared in conformity with the applicable accounting standards issued by the Institute of Chartered Accountants of India and requirements of the Companies Act, 1956

Total: 10

Score : 10

Criteria 2
Audit committee wholly composed of independent members

Justification
The Audit Committee of the Board comprises three independent directors namely Shri Yogendra P. Trivedi, Shri Mahesh P. Modi Dr. Raghunath A.Mashelkar

Total: 10

Score : 10

Criteria 3
At least one non-executive member of the audit committee has expertise in accounting or financial management

Justification
All the members of the Audit Committee possess financial/accounting expertise/Exposure

Total: 10

Score : 10

Criteria 4
Non-executive members of the audit committee with expertise in accounting or financial management form a majority of the Committee

Justification
All three non executive members of the audit committee expertise in financial management.

Total: 10

Score : 10

Criteria 5
Chair of the audit committee is non-executive and has expertise in accounting or financial management

Justification
Chairman, Shri Yogendra P. Trivedi who is a non executive member has expertise in financial management .

Total: 10

Score : 10

Criteria 6
At least one non-executive member of the audit committee has substantial industry knowledge

Justification
1. Mahesh Prasad

Chairman of Telecom Commission & Secretary, Telecommunications Department Director General, Telecommunications Secretary, the Ministry of Coal; Special Secretary (Insurance), Economic Affairs Department Joint Secretary, the Ministry of Petroleum, Chemicals and Fertilizers. Director on the Board of Directors of many public sector and private sector companies, including:

GAIL (Founder Director), IPCL, BPCL, CRL, BRPL, Life Insurance Corporation of India, General
Insurance Corporation, Mangalore Refinery & Petrochemicals, Essar Shipping, BSES, ICICI Prudential Life Insurance Co. ; India Advisory Board of BHP Billiton

2. Raghunath A Mashelkar

The Director General of the Council of Scientific and Industrial Research (CSIR) for over 11 years.
3. Yogendra P. Trivedi
President of the Western India Automobile Association. Member of the All India Association of Industries; W.I.A.A. CLUB, B.C.A. Club,

Orient Club, the Yachting Association of India and the Yacht Club.
Chairman of the Audit Committee, Corporate Governance and Stakeholders

Interface Committee and the Employees Stock Compensation Committee of the Company.
Member of Shareholders/Investors Grievance Committee and the Remuneration

Committee of the Company.

Chairman of the Audit Committee of Birla PowerSolutions Limited. Member of the Audit Committee of Zodiac Clothing Company Limited, Sai Service

Station Limited and Seksaraia Biswan Sugar Factory Limited.

Total: 10

Score : 9

Criteria 7
Non-executive members of the audit committee with substantial industry knowledge form a majority of the committee

Justification
All the Non executive members of audit committee have substantial industry knowledge

Total: 10

Score : 9

Rating Summary
Criteria Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Criteria 7 Total Rating Total / 7 (criteria) = 68/7 = 9.71 The overall rating of Financial disclosure and Internal Controls is 9.71 10 10 10 10 10 09 09 68 Rating

SHAREHOLDER RIGHTS

Internal Parameter

Criteria 1
All the common or equity share holders have one share one vote

Justification
As per companies act 1956 voting right on a poll shall be in proportion to his share of the paid up equity capital of the company

Score- 10/10

Criteria 2
Voting rights capped at a percentage no matter how many shares the investor owns
Justification

The majority shareholders have the most voting rights as indicated by the governance report. This is not considered as a positive sign as it may act as a deterrent to the minority share holders. Score- 0/10

Criteria 3
Voting rights are different for domestic and non resident investors

Justification As specified in the companys governance report. This provides an extra edge to the domestic shareholders.

Score- 10/10

Criteria 4
Voting is confidential

Justification
The Votes of the shareholders are strictly confidential- as per the governance report. This practice is encouraged in the company as it protects the right of the shareholders to vote without any undue pressure and influence

Score- 10/10

Criteria 5
Cumulative voting in case of election of directors
Justification

The election of directors can be done by passing a resolution in the AGM

Score- 5/10

Criteria 6
Shareholders can act in concert way through written communication

Justification

Use of the company website to post shareholders grievances. The company has dedicated contact points for shareholders
Score- 10/10

Criteria 7
Shareholders can convene an EGM with 10% or less of the shares

Justification According to the provision of companies law 1956 EGM can be held by shareholders with 10% or more of the shares Score- 0/10

Rating Summary
Criteria Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Criteria 7 Total Rating Total / 7 (criteria) = 45/7 = 6.428 The overall rating of Financial disclosure and Internal Controls is 6.428 10 00 10 10 05 10 00 45 Rating

MARKET FOR CONTROL

Internal Parameter

Criteria 1
The company has a single shareholding group with voting power in excess of 50%

Justification
The amount of shares held by the AMBANI family is 44.44% of total shares which is still on the higher side.

Score- 5/10

Criteria 2
The company has a unilateral right to amend the bylaws/AOA/constitution without approval of shareholders, which is positive for any company to have strong market for control
Justification

Companys promoters, principal shareholders are able to influence major policy decisions, including overall strategic and investment decisions, decisions on dividend payments, approval of annual budgets, increase/ decrease in share capital, approving mergers and acquisitions, disposals of assets and amending articles of association

Score- 06/10

Criteria 3
Directors can be removed without cause

Justification
The reason for removal of directors is generally not made public by the company

Score- 0/10

Criteria 4
Has a CLASSIFIED board

Justification

The board does not believe in fixed tenure of the directors and thus having different tenures for each director
Score- 10/10

Criteria 5
Involved in a series of cross shareholding of other companies
Justification

The major shareholders are involved in cross shareholdings in different companies which makes the shareholding patterns complex

Score-05/10

Criteria 6
Has adopted a Poison Pill Strategy
Justification

This strategy is generally followed in case of hostile takeovers but in case of a big conglomerate that is highly unlikely
Score- 05/10

Criteria 7
Shareholders rights plan includes a TIDE plan or 3 year sunset provision

Justification The three year independent director evaluation helps asses the current shareholders rights plan. The company does not follow any such strategy which is in the interest of the shareholders. Score- 0/10

Rating Summary
Criteria Criteria 1 Criteria 2 Criteria 3 Criteria 4 Criteria 5 Criteria 6 Criteria 7 Total Rating Total / 7 (criteria) = 31/7 = 4.43 The overall rating of Financial disclosure and Internal Controls is 4.43 05 06 00 10 05 05 00 31 Rating

BOARD ACCOUNTABILITY

The Board of Directors is the apex body constituted by the shareholders for

overseeing the overall functioning of the Company.

The Board provides and evaluates the strategic direction of the Company,

management policies and their effectiveness and ensures that the long-term interests of the shareholders are being served.

INDEPENDENT DIRECTORS
Definition For a director to be independent the director should not have any direct or indirect material pecuniary relationship with the company.

Number.. Non executive Chairman- 1/3rd of the Board Executive Chairman- of the board

Role.. Principles of Corporate Governance require independent directors to review the overall strategy Oversee the performance of management and arrive at an independent judgement. Their key role is to provide unbiased and varied perspective to the board.

BOARD COMPOSITION: RIL

Promoter Director Chairman and Managing Director
Executive Directors

Mukesh D. Ambani

Non-Executive NonIndependent Directors

Nikhil R. Meswani Hital R. Meswani P.M.S. Prasad Pawan Kumar Kapil1 Ramniklal H. Ambani Hardev Singh Kohli2 Mansingh L. Bhakta Yogendra P. Trivedi Dr. Dharam Vir Kapur Mahesh P. Modi Prof. Ashok Misra Prof. Dipak C. Jain

Independent Directors

PARAMETERS FOR RATING BOARD ACCOUNTABILITY UNDER GMI

Combined Chair/CEO/MD

Non-executive directors have a formal session without the executive members at least once a year

Has a designated "lead" or senior non-executive director

Board policy is for the non-executive directors to meet in executive session before or after every board meeting, time permitting

Non-executive Chair

Within the last three years, company has failed to adopt the specific recommendations (or a comparable alternative) of a shareholder proposal approved by a majority vote

NET SCORE FOR THE BOARD ACCUOUNTABILITY = 7.65

GMI RATINGS.
..\Board Accountability.docx Weightages and ratings on different parameters under Board Accountability . The methodology used for ratings is absolutely subjective based on the data available on a aforesaid parameters.

REMUNERATION
The Remuneration Committee is established to: Ensure that remuneration arrangements support the strategic aims of the business Comply with the requirements of regulatory and governance bodies Satisfying the expectations of shareholders and remaining consistent with the expectations of the wider employee population.

COMPENSATION
Remuneration committee wholly composed of independent members Discloses stock ownership guidelines for CEO

Discloses ownership guidelines for the senior management

Shareholders has the say on pay of directors

Claw back of employee bonus/compensation etc. Based on a accounts which are re-stated at a later date

NET SCORE FOR THE COMPENSATION = 9.1

Criteria

Yes/N0

Score

Criteria
Shareholders have the ability to affect remuneration policy through shareholder approval of the remuneration committee report, the proxy's Compensation Discussion and Analysis section or something comparable The remuneration committee has discretion to alter the criteria and/or incentive targets for management after being established or has power to grant incentives or bonuses on a discretionary basis.

Yes/No

Score

Remuneration committee wholly composed of independent members

YES

10

NO

Discloses specific numeric performance targets for the upcoming fiscal year for at least one of the performance objectives

YES

10

YES

Discloses a policy requiring company executives to retain some or all of the shares acquired through stock options for a period of time after the options have been exercised

NO

Claw back policy for any bonuses, options and/or other compensation based on accounts that end up being restated at a later date

NO

The retention period for some or all shares issued upon exercise of stock options is 3 years or longer Some or all shares issued upon exercise of stock options are required to be held until retirement Discloses a policy requiring company executives to retain some or all of restricted shares for some time after they have completed their performance conditions The retention period for some or all restricted shares that have met all performance conditions is 3 years or longer Some or all restricted shares that have met all performance conditions are required to be held until retirement

YES

Discloses stock ownership guidelines for the CEO Discloses stock ownership guidelines for the rest of senior management

YES

10

NO

YES

NO

Discloses stock ownership guidelines for non-executive directors

YES

YES

Percent potential dilution as a result of stock options outstanding Percent potential dilution as a result of stock options outstanding, plus stock options approved for grant but not yet granted

YES

NO

NO

RATING 9.1

CORPORATE BEHAVIOUR
Corporate behaviour is the behaviour of an organisation when considered as a single body
A hundred years ago, resources were unlimited

Today we consume 20 billion gallons of water from

the ground daily

We lose 25 billion tons of topsoil every year There is no polite way to say that business is

destroying the world

CORPORATE SOCIAL RESPONSIBILITY

The contributions which the company can make to

the community can be in the areas of -health -education -infrastructure development (drinking water, construction of schools, etc.) -environment (effluent treatment, tree plantation, treatment of hazardous waste, etc.) -contributions to other social organisations

Accounting frauds RATING CORPORATE BEHAVIOUR PARAMETERS FOR Common red flags

CORPORATE BEHAVIOUR

Corporate Behavior
Parameter
Company (or a current or former senior executive) has pending criminal litigation against it, has been found guilty within the last 3 years, or has pled the equivalent of no contest in such litigation in the past three years, or has been under criminal investigation within the last 3 years

Value
No (1)

Weight
0.85

Company (or a current or former senior executive) has been cited, settled, or been found guilty of by either national or supranational authorities for some breach of law involving non-accounting issues within the last year

No (1)

0.6

Discloses its environmental policies The company has in place a code of conduct (or equivalent) on environmental issues

Yes (1) Yes (1)

0.75 0.8

Alleged by a responsible party that the company caused or substantially contributed to serious environmental damage within the last three years Discloses its environmental performance The company specifically discloses its Greenhouse Gas (GHG) emissions Specific targets for reducing environmental exposures are disclose Company (or a current or former senior executive) has been subject to a formal regulatory investigation for a material issue other than for accounting irregularities within the last year

ND

0.4

Yes (1) Yes (1) Yes (1) No (1)

0.85 0.75 0.7 0.5

Discloses its policy regarding corporate level political donations Has a policy addressing workplace safety Discloses its workplace safety record in the annual report or in another form accessible to shareholders

No (0) Yes (1) Yes (1)

0.7 0.75 0.7

Has been charged with three or more serious workplace safety violations within the last two years

No (1)

0.75

Alleged by a responsible party that the company used child labor (under 14 or the minimum in market, whichever is higher) within the last three years

ND

0.3

Alleged by a responsible party that the company used sweat shops as sub-contractors within the last three years

ND

0.3

Alleged by a responsible party that the company used child labor as a source for sub-contracted work within the last three years

ND

0.3

SCORE: The score has been calculated by multiplying Values with Weights. (1*0.85 + 1*0.6 + 1*0.75 + 1*0.8 + 1*0.85 + 1*0.75 + 1*0.7 + 1*0.5 + 0*0.7 + 1*0.75 + 1*0.7 + 1*0.75 ) = 8.0

Rating RIL :
Financial Disclosure and Internal Controls

9.71/10 Market for Control-4.43/10 Shareholder Rights-6.42/10 Board Accountability-7.65/10 Executive Compensation-9.1/10 Corporate Behavior-8/10

Thus, on the scale of 10 we would give reliance 7.55.

Thank You