narayanamoorthy committee

8/7/2019 narayanamoorthy committee

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SHRI. N.R.NARAYANA MURTHYCOMMITTEE


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What Is Corporate Governance ?

Corporate Governance is the acceptance by

Management ofthe inalienable rights of

shareholders as the true owners ofthe

corporation and oftheir own role astrustees on behalf ofthe share holders.

It is about commitment to values , aboutethical business conduct and making a

distinction between personal and corporate

funds in the management ofa company.


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History Of CG In India

Corporate Governance initiatives in India

began in 1998 with the Desirable Code of

Corporate Governance - A voluntary code

published by CII.

Later it was followed up by the

Kumaramangalam Birla Committee Report

In February , 2000


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Why Shri.N.R.Narayana Murthy

Committee ?

Fair and transparent to shareholders in all transactions

Want of Ethical Leadership Existence

CG cannot be regulated by legislation alone Increased Attention on CG is a result of financial crisis

Investors Expectation To Adopt Good CG practices

SEBIs beliefto improve CG standard in India

There is no single model ofgood CG

If Management is about running businesses , then CG isabout .


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Peoples Question

????? CG costs are high ?????

What SHRI . N. R. Narayana Murthy Says :

It should be noted that the failure to

implement good governance procedures

has a cost beyond regulatory problems .


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Implementation of corporate

governance requirements

The Recommendations were implemented

through Clause 49 of the Listing

Agreements, in a phased manner by SEBI.

They were made applicable to all companies

in the BSE 200 and S&P C&X Niftyindices, and all newly listed companies, as of

March 31, 2001.


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Compliance withthe Codeand SEBIs

experience

The companies haveto submit compliance statuson eight sub-clauses namely:

-->Board ofDirectors

--> Audit Committee

--> Shareholders / Investors GrievanceCommittee

--> Remuneration ofdirectors

-->Board procedures

--> Management

--> Shareholders

--> Report on Corporate Governance


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All companies are required to submit a

quarterly compliance report to the stock

exchanges within 15 days from the end ofa

financial reporting quarter.

The report has to be submitted either by the

Compliance Officer or by the Chief Executive

Officer ofthe company after obtaining dueapprovals


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Rationale for a review ofthe Code

SEBI believedthata needto review theexisting

code on corporate governancearose fromtwo

perspectives :-(a) To evaluatetheadequacy oftheexisting

practices

(b) To further improvetheexisting practices.


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Constitution ofthe Committee

The SEBI Committee on Corporate Governance

(the Committee) was constituted under the

Chairmanship of Shri N. R. Narayana Murthy,

Chairman and Chief Mentor of Infosys

Technologies Limited.

The Committee met thrice on December 7,

2002, January 7, 2003 and February 8, 2003, todeliberate the issues related to corporate

governance and finalize its recommendations

to SEBI.


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Terms of Reference

** To review the performance of corporate

governance

** To determine the role of companies in

responding to rumour and other price

sensitive information circulating in the

market, in order to enhance the

transparency and integrity ofthe market.


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ApproachImportance

How important is the recommendation to the member?

FairnessDoes the recommendation enhance fairness to all

stakeholders, by minimizing asymmetry ofbenefits?

Accountability

Does the recommendation make corporate management more

accountable?Transparency

Does the recommendation enhance transparency?

Ease ofimplementation

Is the recommendation easy to implement?

VerificationIs the recommendation objectively verifiable?

Enforcement

Can the recommendation be effectively enforced?


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Recommendations whose ratings were 7and

above were then aggregated, on eachoftheseven parameters setoutabove.

The recommendations were then sortedin

descending orderof importance.

The top 20 recommendations were presented

to the Committee for their views.

These recommendations were discussedin

detail by the members and will form the basis

of the final recommendations of the

committee.


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Key Issues Discussed

andRecommendations


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Audit committee

Members should be financially literate with atleast oneexpert

Explanation 1 The term financially literate means theability to read and understand basic financial statementsi.e. balance sheet, profit and loss account, and statementof cash flows.

Explanation 2 A member will be considered to haveaccounting or related financial management expertise ifheor she possesses experience in finance or accounting, orrequisite professional certification in accounting, or any

other comparable experience or background which resultsin the individuals financial sophistication, including beingor having been a chiefexecutive officer, chief financialofficer, or other senior officer with financial oversightresponsibilities.


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Audit Committees Should Review

Financial statements and draft audit report,including quarterly / half-yearly financialinformation

Management discussion and analysis of

financial condition and results of operations Reports relating to compliance with laws and

to risk management

Management letters / letters ofinternalcontrol weaknesses issued by statutoryInternal auditors

Records of related party transactions.


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Audit Reports and Audit Qualifications

In case a company has followe d a treatmentdifferent from that prescribed in an accountingstandard, management should justify why they

believe such alternative treatment is morerepresentative of the underlying businesstransaction.

Management should also clearly explain thealternative accounting treatment in the footnotesto the financial statements


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RelatedParty Transactions

Records ofall transactions with related parties

including their bases / methodology should be

placed before the Independent auditcommittee at each Board meeting for formal

approval/ratification.


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Risk Management

Management should place a report before the

entire Board ofDirectors every quarter

documenting the business risks faced by thecompany, measures to address and

minimize such risks, and any limitations to the

risk taking capacity ofthe corporation and thisdocument should be formally approved by the

Board.


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Training of Board members

It was also suggested that Board members be

trained in the business model ofthe company

as well as the risk profile ofthe business

parameters ofthe company.


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Proceeds from InitialPublic Offerings

(IPO)

Companies raising money through an InitialPublic Offering (IPO) should disclose to theAudit Committee, the uses / applications of

funds by major category (capital expenditure,sales and marketing, working capital, etc), ona quarterly basis.

This statement should be certified by theindependent auditors ofthe company.


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Code of Conduct

It should be obligatory for the Board ofa

company to lay down the code of conduct

for all Board members and senior

management ofa company.

This code of conduct shall be posted on the

website ofthe company.


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Nominee directors

There shall be no nominee directors.

Where an institution wishes to appoint a director onthe Board, such appointment should be made by the

shareholders. An institutional director, so appointed, shall have the

same responsibilities and shall be subject to the sameliabilities as any other director.

Nominee ofthe Government on public sectorcompanies shall be similarly elected and shall besubject to the same responsibilities and liabilities asother directors.


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Non-Executive Director Compensation

All compensation paid to non-executivedirectors may be fixed by the Board ofDirectors and should be approved by

shareholders in general meeting.

Limits should be set for the maximum

number of stock options that can be grantedto non-executive directors in any financialyear and in aggregate.


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Independent Directors

Apart from receiving director remuneration,does not have any material pecuniary

relationships or transactions with the company,

its promoters, its senior management or its

holding company, its subsidiaries and associatedcompanies

Is not related to promoters or management at

the board level or at one level below the Board

Has not been an executive of the company in

the immediately preceding three financial years


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Is not a partner or an executive of the statutoryaudit firm or the internal audit firm that is

associated with the company, and has not beena partner or an executive of any such firm forthe last three years.

Is not a supplier, service provider or customer of

the company. This should include lessor-lesseetype relationships also

Is not a substantial shareholder of the company,i.e. owning two percent or more of the block of

voting shares. Same Remuneration as if paid to a non-

executive director


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Whistle Blower Policy

Personnel who observe an unethical orimproper practice (not necessarily a violation oflaw) should be able to approach the auditcommittee without necessarily informing theirsupervisors.

Companies shall take measures to ensure thatthis right of access is communicated to allemployees through means ofinternal circulars,etc.

The employment and other personnel policiesof the company shall contain provisionsprotecting whistle blowers from unfairtermination and other unfair prejudicialemployment practices.


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The appointment, removal and terms of

remuneration of the chief internal auditor

must be subject to Audit Committee Review.

Such affirmation shall form a part of the

Board report on Corporate Governance that

is required to be prepared and submitted

together with the annual report.


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Subsidiary Companies

The provisions relating to the composition of theBoard of Directors of the holding companyshould be made applicable to the composition

of the Board of Directors ofsubsidiarycompanies.

At least one independent director on the Board

of Directors of the parent company shall be adirector on the Board of Directors of thesubsidiary company.


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Real Time Disclosures

The Committee also noted the issue of rumorverification by stock exchanges. It noted a view thatBoard decisions that were price sensitive should bedisclosed to the markets within 15 minutes. Stockexchanges are currently responsible for rumorverification.

The Committee however believed that this issue

needs to be studied with much greater depth by SEBIand the stock exchanges, and should not be restrictedto a corporate governance perspective alone.


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These wouldincludeevents suchas :-

(a) A change in the control oftheCompany

(b) A companys acquisition / disposal ofa

significant amount ofassets(c) Bankruptcy or receivership

(d) A change in the companys independent

auditors(e) The resignation ofa director.


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Recommendations of the Naresh

Chandra Committee

Management should provide a clear description in plainEnglish of each material contingent liability and its risks,which should be accompanied by the auditors clearlyworded comments on the managements view.

This section should be highlighted in the significantaccounting policies and notes on accounts, as well as, inthe auditors report, where necessary.

This is importantbecause investors and shareholdersshould obtain a clear view of a companys contingentliabilities as these may be significant risk factors thatcould adversely affect the companys future financialcondition and results of operations.


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CEO / CFO Certification

Reviewed the balance sheet and profit and lossaccount

Statements together present a true and fair view ofthe company

Responsible for establishing and maintaining internalcontrol

Disclosed to the auditors as well as the AuditCommittee, instances of significant fraud

Indicated to the auditors, the Audit Committee and in

the notes on accounts, whether or not there weresignificant changes in internal control and / or ofaccounting policies during the year.


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Removal ofIndependent Directors

It was suggested that companies should inform SEBI /stock exchanges within five business days of the removal/ resignation of an independent director, along with astatement certified by the managing director / director /company secretary about the circumstances of suchremoval / resignation (specifically whether there was anydisagreement with the independent director that causedsuch removal / resignation).

Any independent director sought to be removed or whohas resigned because of a disagreement withmanagement should have the opportunity to be heard ingeneral meeting.


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Term of Office ofNon-Executive

Directors

Persons should be eligible for the office of non-

executive director so long as the term of office

did not exceed nine years (in three terms of

three years each, running continuously).

The Committee recommends that the age limitfor directors to retire should be decided by

companies themselves.


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Disgorgement of Profits

It was suggested that CEOs / COOs / CFOs

should disgorge equity or incentive based

compensation, or profits arising from trading

in company stock, if a restatement of

financial statements is required or if there is

any corporate misconduct leading to a

financial liability.


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Corporate Governance Ratings

It was suggested that corporate governancepractices followed by companies should

be rated using rating models.

It was also suggested that companies should

be rated based on parameters of wealthgeneration, maintenance and sharing, as wellas on CG.


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SIGNED BY


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Shri N R Narayana Murthy, Chairman & Chief Mentor,Infosys Technologies Limited - Chairman oftheCommittee

Shri Y H Malegam, Managing Partner, S B Billimoria &Co.

Shri Ravi Narain, Managing Director, NSE

Shri A C Muthiah, President, FICCI

Shri R K Somany, President, ASSOCHAM Shri Ashok Soota, President, CII

Shri M K Doogar, Representative, PHDCCI

Shri Sumit Mazumder, President, BCCI

Shri Kamlesh S. Vikamsey, Member Central Council,ICAI

Shri S Gangopadhyay, President, ICSI

Shri T. R. Ramaswami, CEO, AMBI


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Dr. Manoj Vaish, Executive Director, BSE

Shri A K Narayan, President, Tamil Nadu InvestorsAssociation

Shri Nitin Shingala, Investors Grievances Forum Prof. Manubhai Shah, Managing Trustee, CERC

Shri Omkar Goswami, Chief Economist, CII

Ms Sucheta Dalal, Consulting Editor, Financial Express

Shri R Gopalakrishnan, Executive Director, Tata Sons Ltd. Shri D M Satwalekar, M D & CEO, HDFC Standard Life

Insurance

Shri M K Chouhan, Chairman, Mahendra & YoungKnowledge Foundation

Ms. D N Raval, Executive Director, SEBI

Shri Pratip Kar, Executive Director , SEBI

Shri P K Bindlish, General Manager, SEBI, Member Secretary


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Conclusion

The Committee believes that Its

recommendations raise the standards ofcorporate governance In Indian firms andmake them attractive for domestic and globalcapital.

These recommendations will also form thebase for further evolution of the structure ofcorporate governance in consonance with therapidly changing economic and industrialenvironment of the country in the upcomingyears too.

- SHRI . N.R. NARAYANA MURTHY

narayanamoorthy committee

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