Indian Committees and

Guidelines
Deficiencies of Companies Act
 The Companies Act, 1956 came into
existence in an environment of License
and Permit Rajs. Over two dozen
amendments to the Act have not been
found adequate to tackle the present-day
corporate frauds; their enforcement have
remained weak and inefficient. Some of
the deficiencies could be noted as:
1. Non-executive directors have very little
formal roles to play
2. Non-executive directors are ornamental
positions they could be on the boards of
20 companies
3. In regard to financial reporting the
act contains only provisions that
are rule-based and ritualistic but
not driving transparency
4. No formal qualifications for a
director of the company
5. Though auditors are supposedly
appointed by the shareholders, the
latter have very little interaction
with the former – malpractices are
the result of collusion with auditors
and management
Working Group on the
Companies Act, 1996
 The government set up a working group
in August, 1996 to rewrite the Companies
Act. Several recommendations were
made by the working group.
 With regard to financial disclosures,
following recommendations were made:
1. Apart from disclosing directors’ income in
the P & L A/c, a tabular form that gives
out details of the remuneration and
commission should be appended
2. Costs incurred in availing services of a
group resource company must be
separately disclosed
3. Directors’ report should contain
information on its divisions such as their
share in total turnover, review of
operations during the year, market
conditions, future prospects
4. Making separate disclosures about the
end-use-of such funds generated from
public through shares, debentures, or
other securities- how much were utilized
in the financial year ended and where are
the residual funds
5. Any inappropriate treatment of an item in
the balance sheet or P & L A/c should be
dealt with in the Directors’ report
 In regard to non-financial disclosures,
following recommendations were made:
1. Comprehensive information on the relatives
of directors – either as employees or board
members
2. Maintain a register disclosing directors’
interests in any contract or arrangement of
the company- shareholders should be
informed about this in the AGM notice
3. Existence of directors’ shareholding register
to be mentioned in the AGM notice
4. Details of loans availed by full-time directors
and limited for only housing, medical
assistance, and education of family members
The CII Initiative
 A national task force
headed by past president of CII,
Rahul Bajaj as chairman
presented its draft guidelines
and the Code of Corporate
Governance in April 1997 which
CII adopted after they were
debated at workshops and
seminars. CII recommendations
contained:
1. The board should meet at least 6 times in an year
2. Companies with turnovers over Rs. 100 crores
and above should have professionally competent
independent non-executive directors who could
30% of the board if the chairman is non-
executive and 50% if the chairman and MD is
same person
3. A person should not be directors in more than 10
listed companies
4. Non-executive directors should be active
participants in the boards and not just passive
spectators – should have clearly defined roles
such as member of audit committee – should
know how to read balance sheets, etc
5. Non-executive directors to be offered commission
based on current profits (apart from sitting fees)
to secure their better inputs
6. While re-appointing directors attendance records of
the directors should be given. Directors’ with less
than 50% attendance shall not be re-appointed.
7. Key information to be placed before the boards:
 Annual operating plans & budgets for capital,
manpower, and overheads
 Internal audit reports including cases of thefts and
dishonesty
 Serious accidents/occurrences, effluent & pollution
problems
 Defaults in payments of interest/principal on any
public deposits/secured creditors/financial
institutions
 Defaults of non-payments in lieu of principal on any
company or materially substantial non-payments
for goods sold by the company
 Details of joint venture/ collaboration
agreements
 Transactions that involve payments toward
goodwill, brand equity, and intellectual
property
 Recruitment and remuneration of senior
officers just below the board including the
appointment or removal of CFO and CS
 Labor problems and proposed solutions
 Returns on foreign exchange exposure and
risks of adverse exchange rate movement
 Major Indian Stock Exchanges should
insist upon a compliance certificate
signed by CEO and the CFO stating:
1. The company will continue to be in
business in the following year
2. The accounting standards and principles
conform to the standard practice
3. The management was responsible for
preparation, integrity, and fair
presentations of the financial statements
4. The board has overseen the internal
accounting and administrative controls
directly or through audit committees
 Kumar Mangalam Birla
Committee, 1999
 SEBI appointed the Birla committee in 1999 to
suggest steps to promote and raise standards of
corporate governance. The Birla report contained
both mandatory and non-mandatory
recommendations.
Mandatory recommendations
1. Applicable to all listed companies with paid up share
capital of Rs. 3 crore and above
2. The board should have an optimum combination of
executive and non-executive directors: 1/3
independent directors when there is a non-executive
chairman
50% independent directors when chairman is executive
 Birla Committee defines independent
directors as directors who apart from
receiving directors’ remuneration do
not have any material pecuniary
relationship or transactions with the
company, its promoters, its
management, or its subsidiaries,
which in the judgment of the board,
may affect independent judgment of
the directors.
3. Audit Committee
The audit committee should have
three members, all being non-
executive directors with a majority
being independent and at least one
director having financial and
accounting knowledge.
The audit committee is expected to
enhance the credibility of the
financial disclosures and promote
transparency by meeting the
following stipulations:
a. Company will continue business in the following
year
b. The accounting policies and principles conform to
standard practice
c. The management is responsible for the
preparation, integrity, and fair presentation of
financial statements and other information
contained in the annual report. Besides the
chairman should be an independent director and
must be present at the AGM to answer
shareholder queries
d. The audit committee should meet at least thrice
in an year with a gap of not more than six
months
e. The audit committee should function as a bridge
between the board, the statutory auditors, and
internal auditors
4. Remuneration Committee: The board

should decide the remuneration of the

non-executive directors. Full disclosure of
the remuneration package of all the
directors covering salary, bonuses, stock-
options, pension fixed components,
performance linked incentives, etc. is to
be made in the section concerning
corporate governance of the annual
report
5. Boards should met at least four times in
an year, with a maximum time gap of
four months. Minimum information of
annual operating plans, and capital
budgets, quarterly results, minutes of
meetings of audit and other committees ,
information on recruitment and
remuneration of senior officers ,
significant labor problems, material
defaults in financial obligations, statutory
compliances etc should be placed before
the board.
A director should not be a member in
more than ten committees and act as
chairman of more than five committees
6. The Directors’ report should
cover industry structure, threats and
opportunities, segment-wise or product-
wise performances, risks, internal
control systems
7. Shareholders should be provided with
sufficient information about the
background and qualifications of new
directors and those are getting re-
appointed
 Non-mandatory recommendations:
1. Chairman of the board
The role of the chairman of the board
in principle has to be different from
that of the CEO though same
executive can perform both roles. A
non-executive chairman should be
provided with an office on company
expenses and all official expenses
should be reimbursed.
2. Remuneration committee
The board should set up a
remuneration committee to
determine specific remuneration
package for executive directors
including pension rights and other
compensation payments if any. The
committee should have at least three
non-executive directors and the
chairman has to be an independent
director. All directors should be
present in all meetings. The
chairman of the committee should be
present in the AGM to answer
questions from shareholders.
 3. Shareholders’ rights
Half-yearly declaration of financial
performance including summary of the
significant events in the 6 months should
be sent to all shareholders.
4. Postal ballot
Shareholders who are unable to attend
general meetings should be permitted to
vote by postal ballot on key issues like
following:
 Alteration in the memorandum of
association such in the case of changes in
name, objects, address of registered
office etc.
 Sale of whole or substantially the whole of
the undertaking
 Sale of investments in the companies,
where shareholding or the voting rights of
the company exceeds 25%
 Making further issue of shares through
preferential allotment or private placement
basis
 Corporate restructuring
 Entering a new business area not germane
to the existing business of the company
 Variations in rights attached to class of
securities
 Matters relating to change in management
 Naresh Chandra
Committee Report - 2002
 This committee was appointed by the
Department of Company Affairs. Its
report dealt with:
1. The auditor-company relationship
2. Disqualifications for audit assignments
3. List of prohibited non-audit services
4. Independence standards for consulting
5. Compulsory audit partner rotation
6. Auditor’s disclosure of contingent
liabilities
7. Auditor’s disclosure of qualifications and
consequent action
8. Management’s certification in
the event of auditors
replacement
9. Auditor’s annual certification of independence
10.Appointment of auditors
11.Certification of annual audited accounts by CEO
and CFO
12. Auditing the auditors
13. Setting up of the independent quality review
board
14. Proposed disciplinary mechanism for auditors
15. Independent directors
16. Audit committee charter
17. Exempting non-executive
directors from certain
liabilities
18. Training of independent
directors
19. Establishment of serious corporate
fraud office
20. SEBI and subordinate legislation
 It did not make any distinction between a
board with a executive chairman or non-
executive chairman. Either way the board
should be comprised of at least 50%
independent directors
 In regard to audit committees, Naresh
Chandra report recommended that all audit
committee members should be
independent directors (Birla report had
recommended that audit committees
should have non-executive directors with
at least two of them being independent
directors)
 In a move that could affect small audit firms, it had
recommended that along with its subsidiary
associates or affiliated entities, an audit firm should
not derive more than 25% of business from a single
corporate client.
 The report stressed that the partners and at least
50% of the audit team should be rotated once in
every five years
 It drew up a list of prohibited non-audit services
 It said that nominees of institutions (FIs) cannot be
counted as independent directors
 Because of the worry that many good and
competent persons may not opt for independent
directorships in the boards, it recommended that
these directors should be exempt from the civil and
criminal liabilities under the companies act.
 Narayana Murthy
Committee Report - 2003
 SEBI set up the N R Narayana Murthy
Committee in February, 2003. Its
terms of reference were:
1. To review the performance of the
corporate governance
2. To determine the role of companies in
responding to rumor and other price
sensitive information circulating in the
market in order to enhance the
transparency and integrity of the
market
Narayana Murthy Committee
-mandatory recommendations

 Audit Committee – the bedrock

of quality governance
 Recommended a bigger role for
audit committees
 It required that audit
committees should review the
following information as
mandatory:
1. Financial statements and draft
audit reports including
quarterly/half yearly information
2. Management discussion and
analysis of financial condition and
the results of the operations
3. Report relating to compliance with
laws and risk management
4. Management letters of internal
control weaknesses issued by
statutory internal auditors
5. Records of related party
transactions
 Related party transactions – affirm the
bases of related parties and insist on formal
approval of any transactions that are not on
arm’s length basis
 Proceeds from initial public offerings –
companies should disclose to the audit
committees the uses and application of the
funds under major heads on a quarterly
basis
 Risk management – The boards of the
companies should be made fully aware of
the risks involved in the business and
shareholders should know about the process
by which companies manage their risks-
Management should place before the entire
board a report every quarter the business
risks faced by the companies
 Code of Conduct – the committee
recommended that it should be
obligatory for the board to lay
down a code of conduct for all
board members and senior
management of the company.
The code should be put up on the
company website and all
members and senior
management should affirm
compliance on annual basis. The
annual report contain a
declaration to this effect signed
by the CEO and COO.
 Nominee Directors – the report
recommended doing away with
nominee directors. If corporations
want such directors, the appointment
should be by the shareholders. And
in case such directors are appointed
they will have the same
responsibilities of other directors and
would be liable to all those applicable
to other directors of the company.
The same conditions are to be
applicable to the nominees of the
government in public sector
companies.
 Other recommendations –
 Compensation to non-executive
directors are to be approved by
the shareholders in the general
meetings (restrictions placed on
stock options; full details of
compensation to be disclosed)
 Whistle blower policy to be in
place in a company